An investment strategy focused on alternative investments can offer low or even zero correlation with traditional markets and also provide investors with a wide range of opportunities. Simply put, investing in alternative investments can help provide better portfolio diversification for those willing to accept a potentially higher level of risk. This becomes particularly attractive during market downturns.

Here are three reasons why adding alternative assets to a portfolio can create new opportunities:

1. Moving in a different direction

It is important to remember that there are different ways to interact with the markets beyond the traditional buying and selling of individual securities. For example, some alternative investment strategies employ techniques designed to generate profits when a stock’s price falls; others seek to offset the risk of unexpected price movements through hedging. These approaches can help cushion a portfolio when public markets are volatile.

2. Access to New Opportunities

Alternative investments expand the investment universe. When traditional investments seem unattractive—and in some cases even daunting—alternative investments can offer additional opportunities by providing access to specialized markets beyond stocks, bonds, and other liquid assets. This may include private markets and other investments such as commodities, real estate, and infrastructure.

3. Understanding the Potential Benefits of Illiquidity

During times of market stress, alternative strategies—which are not held in daily-liquid vehicles—are less likely to be forced to sell quickly and at a lower price. On the other hand, mutual funds—which are more liquid strategies—may need to raise cash to meet redemption requests. At the same time, they may be positioned to take advantage of attractive opportunities to buy at a discount due to market stress and dislocations. Furthermore, less liquid assets often provide higher returns to investors due to the increased risks involved.

So, is now a good time to invest in alternative assets? While the current COVID-19 crisis has already shaken the markets and investor confidence, the uncertainty about what lies ahead can be just as overwhelming. Now more than ever, investors should consider all their options when building a portfolio for their future. This can mean a number of things: increasing diversification, investing in new or different markets, and taking advantage of unique investment opportunities—such as private credit—that are arising from current market disruptions.

Being prepared to weather a post-pandemic environment by thinking proactively may be one of the most valuable strategies of all.

Source: PIMCO