There are many myths about alternative investments – even the concept is misconstrued by many people, given the lack of mainstream awareness about these. The term is assumed to be some form of hedge funds or other high-risk, exotic funds that only high networth individuals and large institutions have access to. In reality, alternative investments are widely accessible and have a place in nearly every portfolio.
Some other misconceptions surrounding these investments are the following:
Myth: Alternatives are considered a unique asset class
Others see alternative investment options as standalone asset types that are distinct from traditional asset classes, including stocks or bonds. Investing in alternatives actually represents different approaches to investment that span various markets and vehicles.
Myth: Alternatives are inherently more risky and volatile than traditional investments
Some alternative investment options can indeed experience higher volatility and illiquidity, however, they are not always worse than traditional asset classes. Additionally, alternative investments can be used as portfolio diversifiers, reducing overall volatility.
Myth: Investing in a single alternative class will diversify the portfolio
There are people who assume that investing in one type of hedge fund or private equity is enough to diversify a portfolio that will withstand the market climate. As a matter of fact, a single alternative investment strategy will concentrate risk exposures. Multiple strategies will mitigate concentration risks.
Chicago-based Charles F. Whitman is the founder of Whitman Asset Management, a firm that provides alternative investment programs that target exceptional risk-adjusted returns. For more insights regarding alternative investment, follow this Twitter account.