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Why Alternatives?

Historically, alternatives have produced greater risk-adjusted yields and they also present a level of diversification in a portfolio (i.e. they can provide a safeguard to returns when equity markets underperform).

Some alternative investments can experience higher levels of volatility than traditional stocks and bonds (e.g. commodities), but overall, they are not as volatile compared to any other investment. In fact, many alternatives exhibit far less volatility than stock markets, based on the markets they trade in and/or their management styles.

Additionally, because alternatives approach financial markets differently than traditional investments, they can provide returns that exhibit low correlations with more traditional approaches. As such, adding alternatives to a diversified portfolio has the potential to provide lower volatility than a portfolio composed exclusively of traditional stocks and bonds.

Multi strategy alternative funds may alleviate concentration risks. Investing in only one type of alternative strategy may provide some diversification benefits, but can also concentrate risk exposures.

Globally, institutional investors allocate an average of 24%1 of their portfolios to alternative assets. Examples of institutional investors that allocate a significant proportion of their portfolios to alternative assets include:

  • Future Fund – 39%2
  • Harvard Management Company – 42%
  • CalPers – 21%

In Australia, Alternatives are projected to become Australia’s largest asset class in 2021 with international equities in second place.3

  1. Global Pension Assets Study 2016, Willis Towers Watson (February 2016).
  2. Includes assets identified by the Future Fund as either alternative assets, private equity, infrastructure and timberland and property as at 31 December 2015.
  3. Rainmaker Information (Rainmaker Roundup – September 2015, Edition 72 (December 2015).