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What are Alternative Investments? 4-Part Introduction

Woman smiling and explaining what are alternative investments to client.

The market has seen a lot of uncertainty in recent years. Because of this, many organizations are looking for new ways to diversify their investment portfolios. Our best-kept “not-so-secret” secret: alternative investments.

In this blog, we'll explore alternative investments with a focus on how they can potentially shield your portfolios from downside market volatility. In addition, we'll break down its benefits and risks and whether it could be a good fit for you.

Part 1: What are alternative investments?

Alternative investments may help diversify your investment portfolios through non-traditional investment strategies. Non-traditional investment options have varying liquidity ranges depending on the strategy and fund structure.

Alternative investments are sometimes referred to as alternative assets. According to the Harvard Business School, the seven types of alternative investments are:

  • private equity;
  • private debt;
  • hedge funds;
  • real estate;
  • commodities;
  • collectibles; and
  • structured products.

This varied range of assets, beyond conventional investment types, will have varying risk and return profiles. Some, but not all, may help provide enhanced diversification and downside protection to your investment portfolio.

If you're managing a retirement benefits plan, understanding the intricacies of alternative investments is crucial. Broadening your investment scope may help shield your retirement savings from market volatility, potentially providing a more secure financial future.

In addition, by learning the nature of alternative investments, you’ll gain a deeper understanding on how to analyze their potential downsides, such as operational, financial, counterparty and liquidity risks. This will help you during the due diligence process, as you determine how they integrate into your fiduciary responsibilities.

Part 2: Unveiling the advantages of your organization

Organizations managing retirement programs often grapple with the challenge of balancing risk and return. This is where alternative investments step into the spotlight, offering a host of advantages that go beyond simple diversification. In this section, we’ll discuss the benefits of alternative investments and their associated risks.

Risk diversification

Data from industry reports and case studies reveal that alternative investments can play a pivotal role in risk reduction. The Economic Times reports, "Alternative investments can be used as a technique for risk management to protect a portfolio against certain dangers. For instance, investing in commodities or real estate can serve as a hedge against inflation."

By adding assets that may not move in lockstep with traditional markets, organizations can create a more resilient portfolio, better positioned to weather economic downturns. Yet, like any other investment this is no guarantee. All companies should carefully assess their risk tolerance, conduct research and seek professional advice. This is especially true for alternative investments, as they involve complex structures and strategies.

Regulatory framework alignment

The Employee Retirement Income Security Act of 1974 requires fiduciaries to “act prudently and must diversify the plan's investments in order to minimize the risk of large losses.” To aid in this and meet ERISA regulatory requirements, organizations have investigated adding alternative investments to their portfolio.

Alternative investment assets can align with the regulatory frameworks governing retirement accounts, ensuring ERISA compliance while simultaneously opening doors to opportunities that traditional assets might not provide.

However, failure to satisfy ERISA’s standards could lead to statutory penalties and could trigger potential criminal liability, making it crucial that organizations perform due diligence.

Increased diversification

The allure of alternative investments lies in their potential to increase diversification. By including non-traditional strategies in your retirement program, you can reduce your portfolio’s dependence on the direction of stock and bond markets.

Because alternative investments aren't traditional assets, it should be noted that they can experience higher volatility. So, while they can help increase diversification, you should be aware that this could result in significant losses.

Potential for higher returns

Lastly, the potential for higher long-term returns is a beacon for organizations seeking to maximize the growth of their retirement portfolios. While it's essential to acknowledge the risks associated with alternative investments, well-informed decisions and strategic allocations can potentially lead to higher long-term returns for an investment portfolio through enhanced diversification and downside protection.

Again, as we mentioned above, the potential for higher returns also means there’s a potential for higher losses. Also, many alternative investments are illiquid. Since they can’t be easily bought or sold, it’s challenging for investors to access any invested funds before a specific timeframe. So, even if you do get higher returns, you may not be able to touch those funds for a set time.

Part 3: Evaluating if alternative investments are right for you

The journey into alternative investments is not a leap in the dark; it's a well-considered exploration guided by your organization’s financial goals and risk tolerance. As an institutional investor or organization, how do you determine if alternative investments are right for you?

Start by assessing your risk appetite. Alternative investments can be more complex and less liquid than traditional assets, which might not align with everyone's risk tolerance. This is an important factor to consider, as these are some of the larger concerns with alternative investments.

Next, evaluate your investment goals. Are your employees seeking steady income, capital appreciation or a combination of both? Different alternative investments can cater to a variety of objectives, and aligning goals with the unique characteristics of these assets is essential for successful implementation. However, this stage can be hard to research. You must ensure that you’re conducting due diligence and high-level decision-making before adding them to your investment portfolio.

Risk management should be a focal point. While alternative investments can offer substantial rewards, they come with inherent risks. It's crucial to conduct thorough due diligence, understand the potential downsides, e.g., illiquidity, higher volatility and complexity, and have a risk mitigation strategy in place.

Engage in comprehensive research. Each alternative investment category has its intricacies and not all may align with your preferences or financial objectives. As we mentioned before, you’ll need to carefully assess your risk appetite and understand the potential downsides of investment, like any other financial decision.

Explore professional guidance. Given the specialized nature of alternative investments, seeking advice from investment professionals with expertise in this domain can be invaluable. Whether it's a financial advisor, wealth manager or investment consultant, having a seasoned expert by your side can help you navigate the complexities and make well-informed choices.

Part 4: Experts that can help

In the dynamic landscape of alternative investments, embarking on the journey requires careful consideration and strategic planning. One crucial aspect is identifying the right individuals and entities to consult and collaborate with to reach your organization’s goals.

As a starting point, organizations should seek guidance from experienced financial advisors and consultants. These professionals bring a wealth of knowledge about various alternative asset classes and strategies. A qualified financial advisor can help organizations assess their risk tolerance, set investment goals and craft a tailored strategy that aligns with their overall objectives.

TruePlan takes much of the initial work out of your alternative investment search. We actively vet firms and strategies, ensuring they meet our quantitative and qualitative screens and align with organizational goals.

Next Steps: Talk to TruePlan

The "What is alternative investment management?" question takes on profound significance when viewed through the lens of your organization’s retirement program. As you consider the transformative potential of alternative investments, remember that the journey is as critical as the destination.

By incorporating alternative investments into your investment strategy, you're not just embracing diversification; you're potentially finding another way to reach your retirement goals through non-traditional assets. So, whether you're an individual investor or representing an organization, it may be worth assessing how alternative investments can aid your retirement plan, ensuring that you’re meeting ERISA requirements.

If you'd like to get started in alternative investing, TruePlan's team of experts can help! Unlike larger firms, we'll take the time to review your current offerings and organizational goals, mapping out a plan that aligns with your best interests. Contact us today to maximize your retirement program!

TruePlan Benefit and Retirement Advisors is a marketing name of Healthcare Community Securities Corp., member FINRA/SIPC, and an SEC Registered Investment Advisor. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Past performance is not indicative or a guarantee of future returns. The information in this piece is not a recommendation to invest nor should it be relied upon as instruction to invest. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Please visit our website https://trueplanadvisors.com/legal/indices_disclosures for further explanation and detail surrounding the indices referenced within

The information contained herein has been prepared solely for informational purposes and does not represent a specific offering. Nothing contained herein should be construed as a recommendation to buy or sell any security or economic sector. Alternative investments often are speculative, typically have higher fees than traditional investments, often include a high degree of risk and are appropriate only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase volatility and risk of loss. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.

This content is for informational purposes only.  It has been partially generated from an AI language model, which may not always be exhaustive or tailored to individual circumstances.  We encourage you to contact one of our experts for more information.  We assume no liability arising from any use of this content.

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