Not all characteristics of alternative investments are understood by investors. The following article demystifies five misconceptions.

Myth 1: Alternatives are only available to investors and institutions with extremely high net worth.

Truth: There is a wide range of options to choose from within the universe of alternative investments, and these can attract different types of investors. While it is true that some types of funds may restrict investment to qualified or accredited investors, there are other types of investment vehicles that provide access to alternative investments without the same restrictions.

Myth 2: Alternatives add risk to your investment portfolio

Truth: It depends. When viewed as a standalone solution, alternative investments typically have a higher risk profile than more traditional options, given their lower liquidity and higher target returns. However, when viewed as part of an overall portfolio, the risks of the investment appear to be more moderate; Alternatives are influenced by market circumstances that differ from traditional investments, such as stocks and bonds, and do not follow the same performance path as these. In fact, some Alternative strategies, such as market-neutral strategies, are designed to reduce the overall risk of the portfolio. These characteristics make alternatives an attractive source of diversification and potential returns, and even as a buffer against volatility. Beyond investment risk, it is also important for investors to consider other potential risks related to the unregulated structure of many alternative investments. Reviewing the risk tolerance of your portfolio as a whole is a good starting point.

Myth 3: The illiquidity of alternative investments is bad for investors

Truth: In reality, the illiquid nature of certain alternative investments can potentially be a "blessing" for your portfolio. For example, alternative strategies that are not in daily liquidity vehicles are less likely to be forced to sell holdings quickly, and at a lower price, than traditional mutual funds, which may need to raise cash to meet daily redemptions. Furthermore, while investors may not be able to withdraw funds on a daily basis, this greater lack of liquidity may allow for investment in potentially higher-yielding or more complex assets.

Myth 4: Alternative investments are synonymous with hedge funds and private equity funds

Truth: Investment in alternatives is broad and varied. For example, private credit strategies and certain real estate strategies, typically offered through a type of fund similar to private equity, have grown significantly since the Great Financial Crisis, when traditional lenders, such as banks, began to change their financing practices. Alternative credit and private strategies such as these can offer investors the opportunity to generate attractive returns over time, and be compensated for the greater illiquidity and complexity of the risks.

Myth 5: Alternatives are not a necessary part of the portfolio

Truth: Especially during times of uncertainty, investors should look beyond traditional asset classes and seek other sources of returns to meet their financial goals with greater confidence. By adding Alternatives to the mix, investors can enhance portfolio performance, boost diversification, and reduce overall risk. It is important to note that Alternatives can help investors pursue their goals by providing a source of new opportunities and expanding the investment universe.

Source: PIMCO