Alternative investments: diversification of your portfolio

Alternative investments have characteristics and value drivers that differ in part or quite strongly from traditional investment areas, such as the stock market. They therefore offer access to investments that are less dependent on conventional market drivers and thus open up new potential return opportunities. This can help investors build more diversified portfolios and potentially generate better returns. From a portfolio perspective, risk-adjusted return expectations can thus be optimized with a correspondingly long-term investment horizon.

Investments in commodities, real estate and private equity are an alternative to traditional investments because they usually differ from them regarding liquidity, correlation with the markets and risk. Some alternative investments often develop in the opposite direction to traditional investments like stocks and bonds. One of the reasons for this is that they are less strongly influenced by interest rate developments and equity markets. In general, alternative investments also require a longer investment horizon, as they are sometimes more illiquid and tie up investment capital for several years. Within individual alternative investments such as hedge funds, private equity or commodities, there are also different asset subclasses whose characteristics can differ from each other. Which investment suits your portfolio must therefore be checked on a case-by-case basis.

From an investor’s perspective, it is often easier to invest in alternative investments as part of an asset management mandate rather than directly in individual instruments. After all, hedge funds or private equity are sophisticated and sometimes less regulated investments that require more in-depth expertise. In the case of an asset management mandate, the investment portion is determined by the selected strategy and implemented by a portfolio manager.

Other alternative investments, such as gold, are more accessible and understandable to many, making them more suitable for direct investment – whether physical or in the form of a fund. Gold funds, for example, are a popular investment tool because, unlike the purchase of bars and coins, you do not have to worry about physically storing them.

Investments in alternative investments are usually more suitable for advanced and informed investors. This is because they are often associated with higher risk and a higher capital investment. Nevertheless, they can be a useful addition to your investment portfolio; they tend to correlate less with traditional financial markets for stocks or bonds and can potentially lead to greater diversification and a better risk-return profile. Since this type of investment is often less liquid, investors can also potentially achieve an illiquidity premium.

Alternative investments are usually more complex financial products. Therefore, it is important to understand the characteristics as well as opportunities and risks before considering an investment. It is advisable to discuss the various options in the context of your own investment profile and the overall portfolio in a consultation. With alternative investments, it is also sensible to diversify within an asset class, for example to consider different alternative investments.