Unlocking Portfolio Potential: The Value of Alternative Investments

Diversification, with risk spread across various asset types, can help reduce portfolio volatility. The classic rule of 60/40 allocation, with less volatile bonds (40%) matched by riskier equities (60%), may have been a reliable method, but it could now leave portfolios vulnerable to market fluctuations and insufficient growth.  

This is where alternative investments come into play, offering a diversified wealth management approach beyond conventional stocks and bonds.  

What Are Alternative Investments?  

They encompass a wide array of assets that fall outside the realm of traditional investments, ranging from real estate and private equity to hedge funds and commodities. They differ from traditional stocks and bonds in several key ways, including: 

• Low correlation: Alternative investments often have low correlations with traditional asset classes, for example, stocks and bonds. This means their performance may not move in sync with the broader market, providing potential diversification benefits to investors. 
• Illiquidity: Many alternative investments are illiquid, which means they’re not easily bought or sold on public markets. Examples include investments in private equity, real estate, and certain hedge funds. This lack of liquidity may result in longer holding periods and limited ability to access funds quickly. 
• Complexity: Alternative investments can be complex and may require specialized knowledge or expertise to understand and evaluate effectively. Strategies such as derivatives trading, structured products, and certain hedge fund strategies may involve intricate financial instruments and sophisticated investment techniques. 
• Higher minimum investments: Alternative investments often require higher minimum investment amounts compared to traditional assets. For example, investing in a private equity fund or a hedge fund may require significant capital commitments, making these investments inaccessible to smaller investors. 
• Regulatory constraints: Alternative investments may be subject to different regulatory frameworks than traditional assets. Depending on the jurisdiction and the specific type of investment, alternative investments may face fewer regulatory requirements or restrictions, allowing for more flexibility and potentially higher risk. 

Benefits of Alternative Investments 

Let’s take a look at some of the benefits of including alternative investments in your portfolio: 

Lower Volatility 

One of the main advantages of alternative investments is their ability to mitigate volatility within a portfolio. Unlike traditional assets, which often move in tandem with broader market trends, alternatives tend to operate independently.  

By incorporating assets with low correlation to stocks and bonds, investors can reduce their portfolio’s overall risk exposure. In times of market turbulence, this can provide a valuable buffer, helping to preserve capital and maintain stability. 

Broader Diversification 

As we’ve already mentioned, diversification is a cornerstone of sound investment strategy, and alternative investments offer a unique opportunity to broaden your portfolio’s exposure. These assets typically have little correlation to traditional markets, meaning their performance is less reliant on economic cycles or market sentiment.  

By diversifying across various alternative investments, investors can spread risk more effectively and potentially enhance long-term returns. Whether it’s investing in private equity ventures, real estate properties, or commodity futures, alternatives provide access to diverse income streams that can complement traditional holdings. 

Enhanced Returns 

Beyond risk mitigation, alternative investments can also contribute to enhanced portfolio returns. By tapping into niche markets and unique investment strategies, alternatives offer the potential for higher yields compared to traditional assets. Private equity, for instance, provides opportunities to invest in promising startups or established companies before they go public, potentially unlocking significant value over time.  

Similarly, real estate investments can generate steady income through rental yields while offering the potential for capital appreciation. By incorporating alternatives into their portfolios, investors can access a broader universe of investment opportunities, diversify their income streams, and ultimately improve their risk-adjusted returns. 

Potential Tax Efficiency 

Another often overlooked benefit of alternative investments is their potential for tax efficiency. Many alternative assets, such as real estate investment trusts (REITs) or certain types of private equity investments, offer tax advantages that can help investors optimize their tax liabilities. For example, at least 90% of a REIT’s taxable income has to be distributed to shareholders in the form of dividends, resulting in favorable tax treatment for investors.  

Additionally, certain alternative investment structures, such as master limited partnerships (MLPs) or Opportunity Zone Funds, offer unique tax incentives that can further enhance after-tax returns. By strategically incorporating tax-efficient alternatives into their portfolios, investors can maximize their overall investment returns while minimizing tax exposure. 

Should You Consider Alternative Investments? 

Alternative investments present a valuable opportunity for investors looking to diversify their portfolios, mitigate risk, and enhance returns, particularly in today’s dynamic market environment. However, it’s essential to approach alternative investments with careful consideration and due diligence, as they often involve higher complexity and liquidity constraints than traditional assets.  

Here at Opal Wealth Advisors, we can help you explore adopting a diversified approach and harnessing the power of alternative investments to unlock your portfolio’s full potential. Contact us to learn more about the value of alternative investments in securing your financial future.  

Investment in Alternatives is for Accredited Investors only. Investment in private investment funds (“Alternatives”) involves various risk factors, including, but not limited to, potential for complete loss of principal, liquidity constraints, and lack of transparency of the underlying investments. Unlike liquid investments that a client/investor may maintain, private investment funds do not provide daily liquidity or pricing. OWA charges an investment advisory fee in addition to the fees of the private investment funds.