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Investing Ideas
Alternative investments and their roles in multi-asset class portfolios
Many investors look to alternatives to broaden the investment opportunity set and help enhance a portfolio's returns, manage downside risk, and improve diversification.
Key Takeaways
- The term "alternative investment" generally applies to an array of investment types that are distinct from traditional portfolio holdings, such as stocks, bonds, and cash/cash-like instruments. Categories of alternatives include liquid alternatives, private equity, private credit, real assets, and digital assets.
- Alternative investment strategies were at one time largely available only to institutional investors, but asset managers have accelerated their efforts to develop innovative investment vehicle structures that provide broader access to the potential return, risk, and diversification benefits of alternatives.
- We studied the historical investment characteristics of 18 traditional and alternative investment categories and ranked them based on three key metrics: annualized returns, performance amid poor public equity market returns, and diversification benefits.
- Among the alternatives we studied, private equity, we learned that private alternatives demonstrated higher returns than most other asset categories , while certain liquid alternative strategies provided strong diversification benefits, especially during periods of poor public equity performance.
- In a multi-asset class context, we found that expanding the investment opportunity set to include alternative investments can provide a broad range of potential benefits to investment portfolios, including reduced volatility, improved diversification, and enhanced risk-adjusted returns.
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Alternative investments and their roles in multi-asset class portfolios
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Fidelity has developed a framework for allocating to alternative investments based on proprietary research that outlines suggested portfolio mixes across the liquidity spectrum.
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Evaluating alternatives in multi-asset class portfolios
Fidelity Institutional Wealth Adviser (FIWA) explores the structural differences between alternative and traditional asset classes, highlighting the critical importance of manager research for alternative strategies.
Investing involves risk, including risk of loss.
Alternative investment strategies may not be suitable for all investors and are not intended to be a complete investment program. Alternatives may be relatively illiquid; it may be difficult to determine the current market value of the asset; and there may be limited historical risk and return data. Costs of purchase and sale may be relatively high. A high degree of investment analysis may be required before investing.
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