How Alternative Investments Can Help to Mitigate Risk

According to recent figures, nearly half of investment advisors and asset management firms are looking for new ways to diversify their client portfolios. This betrays the facts that the traditional 60/40 portfolio of stocks and bonds is no longer as effective as it once was, thanks to a combination of market shifts and rising geopolitical uncertainty.

Despite this, less than 10% of advisors have indicated that they're adding so-called alternative investment options to client portfolios, which begs the question of where future diversification is going to come from?

Of course, progressive asset management firms such as Wellington Management Funds are bucking this trend, and this at least offers hope from a longer-term perspective. But what are alternatives, and how can they be used to diversify your portfolio and mitigate risk?

What is an Alternative Investment, and Why are Some Firms Reluctant to Get Involved?

An alternative investment refers to an asset that does not belong to conventional types or markets, such as stocks, bonds, and cash.

Historically, they've included high value assets such as private equity, real estate, hedge funds and managed futures, which in turn have appealed to institutional investors and individuals with a high net worth.

As a result of this, it's easy to understand why so many wealth management firms have refrained from integrating alternative investments into their client's portfolios.

After all, some of the more sophisticated assets in this group had minimum investment requirements as high as $1 million, making them completely unsuited to the vast majority of interested parties across the globe.

The Truth About Alternatives and Their Importance in the Current Markets

While this perception may have been true once, however, it's becoming increasingly irrelevant with every passing year.

As with most financial markets and niches, alternatives have experienced a considerable evolution in the digital age, to the point where they now include a wide range of more accessible assets. Available in both single and multi-asset funds, these options boast a far lower minimal investment and yet continue to offer choice and potentially inflated returns to clients.

With the barriers to entry that once surrounded alternatives having been stripped away, now is the ideal time for asset management firms to embrace these assets and enable their clients to reap the rewards.

Remember, alternatives provide the diversification that investors and asset management firms crave in the modern age, as clients look to create sustainable portfolios that reflect the wider, economic climate. Alternative investments also create a risk and reward profile that is considerably different to traditional options, and it's hard to underestimate the importance of this in a volatile and constantly changing economic climate.

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