Investors do not fully understand all the characteristics of alternative investments. The following article debunks five common misconceptions.

Myth 1: Alternative Investments are available only to investors and institutions with extremely high net worth

Fact: There is a wide range of options to choose from within the alternative investment universe, and these can 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 alternative investments without the same restrictions.

Myth 2: Alternative Investments Add Risk to Your Investment Portfolio

Truth: It depends. When viewed as a standalone investment, alternative investments typically have a higher risk profile than more traditional options, due to their lower liquidity and higher target returns. However, when viewed as part of an overall portfolio, the investment risks appear to be more moderate; alternative investments are influenced by market conditions different from those of traditional investments, such as stocks and bonds, and do not follow the same performance trajectory as these. In fact, some alternative investment strategies, such as market-neutral strategies, are designed to reduce the portfolio’s overall risk. These characteristics make alternative investments an attractive source of diversification and potential returns, and even 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. Assessing your portfolio’s overall risk tolerance is a good place to start.

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 shares 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 can allow for investment in potentially higher-yielding or more complex assets.

Myth 4: "Alternative" is synonymous with hedge funds and private equity funds

Fact: Investing in alternative assets is broad and varied. For example, private credit strategies and certain real estate strategies—typically offered through a fund structure similar to private equity—have seen significant growth 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, while being compensated for the greater illiquidity and complexity of the risks involved.

Myth 5: Alternative Investments Are Not a Necessary Part of the Portfolio

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

Source: PIMCO