Not all the characteristics of alternative investments are understood by investors. The following article demystifies 5 misconceptions.

Myth 1: Alternatives are only available to High Net Worth Investors and Institutions.

True: There is a broad offering to select from within the Alternatives universe and these may appeal to 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 Alternatives without the same restrictions.

Myth 2: Alternatives add risk to your investment portfolio

True: It depends. When looking at an investment in Alternatives as a stand-alone solution, it is typically going to 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 investment risks appear to be more moderate; Alternatives are influenced by different market circumstances than traditional investments, such as stocks and bonds, and do not follow the same performance path as traditional investments. In fact, some Alternative strategies, such as market neutral, are designed to reduce overall portfolio risk. These characteristics make Alternatives an attractive source of diversification and potential returns, and even as a buffer for volatility. Beyond investment risk, it is also important for investors to consider other potential risks related to the unregulated structure of many investments in Alternatives. Reviewing the risk tolerance of your portfolio as a whole is a good place to start.

Myth 3: Illiquidity of Alternatives is bad for investors

Truth: In fact, the illiquid nature of certain Alternative investments can potentially be a "boon" to 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. In addition, while investors may not be able to withdraw funds on a daily basis, this greater lack of liquidity may allow investment in possibly higher yielding or more complex assets.

Myth 4: Alternatives are synonymous with Hedge Funds and Private Equity Funds.

True: Investment in Alternatives is wide and varied. For example, Private Lending strategies and certain Real Estate strategies, typically offered through a fund type similar to Private Equity, have seen significant growth since the Great Financial Crisis, when traditional lenders, such as banks, began to change their funding practices. Alternative lending and private strategies such as this can offer investors the opportunity to generate attractive returns over time, and be compensated for the increased 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 improve portfolio performance, boost diversification and reduce overall risk. Importantly, Alternatives can help investors pursue their objectives by being a source of new opportunities and expanding the investment universe.

Source: PIMCO