Alternative assets provide for asset class diversification and allow investors to spread risk across a broader range of investments that are not correlated to assets traded in the financial markets.
Alternative assets include private equity, hedge funds, real estate and commodities. Many of these investments are readily accessible through ETFs and mutual funds, such as hedged investments and REITs.
Alternative assets fall into three major categories:
Convergent assets move up and down with the financial markets. These typically include hedge funds consisting of stocks and bonds. Most portfolios should have exposure to these types of investments.
Divergent assets are largely immune from the volatility in the financial markets. These assets can include commercial real estate, farmland, or distressed debt. Or they can be precious metals such as gold, which often move in the opposite direction of assets traded in the financial markets.
Asymmetrical assets are those that give up a bit of performance when the market is rising, but minimize the downside when the markets are falling. The best way to accumulate wealth is to systematically minimize significant losses. Absolute return vehicles are an effective way to grow wealth, while minimizing losses.
When it comes to alternative investments, one of the biggest mistakes is not considering them as part of a portfolio.