Over the past 20 years, in the global financial system, the alternative investments industry has become a key component in the wealth preservation strategy of investors. As reported by the World Economic Forum in their 2015 issue ''Alternative Investment 2020: An Introduction to Alternative Investments'', the alternative investment industry today represents more than $7 trillion in capital invested across the globe and is increasing at an impressive rate (see below chart) 1.
So what justifies this transition from traditional asset allocation to alternative investments and what are the benefits of alternative investments over securities such as bonds or stocks?
While wealthy investors have historically always deployed capital in private companies, positive regulatory changes, technological changes and innovative ideas have greatly contributed to the rise of alternative investments. But most importantly, while dramatic market events such has the 2007-2009 financial crisis caused economic turmoil and global uncertainties across the globe, alternative investments offered great performance during and after the crisis compared to stocks and bonds.
Especially during distressed periods where capital is generally limited, active skilled managers are looking to deploy capital in the most productive way by funding innovative products, improving corporate governance of existing companies and enabling some firms to become more productive and efficient to increase their profitability.
Thanks to skilled managers, the alternative investment industry now offers a wide range of financial products such as (but not limited to), private equity deals, real assets, commodities, hedge funds, structured products and more. Investors can find opportunities that will suit their profile in structures that will also generally be tax efficient to accommodate the jurisdiction where they live.
Investors seeking to preserve their wealth are increasingly adding alternative investments to their portfolio by choosing the new investment model over the traditional approach. This is mainly because of the new model's flexibility and capacity to generate positive returns independent of market conditions.
Moreover, while investors generally prefer "not to put all their eggs in the same basket" they typically invest in various assets classes hoping to lower their risks. Unfortunately, asset class diversification does not guarantee a proper diversification. On the other hand, while risk management offers a better risk-balanced portfolio, studies have show that compared to a typical 60/40 stocks/bonds allocation, reducing stocks and bonds exposures and adding 20% of alternative investment such as managed futures would reduce your portfolio risk without sacrificing its performance2.
Because of the advantages they offer to investors and the important part they already play in the global economy and society in general, the growth of alternative investments under management across the globe will unquestionably continue to increase. Investors looking to preserve their wealth and at the same time secure their family’s financial future, will undoubtedly benefit from adding alternative investments to their portfolio.
1- World Economic Forum, Alternative Investments 2020, retrieved from: http://www3.weforum.org/docs/WEF_Alternative_Investments_2020_An_Introduction_to_AI.pdf
2- Kaplan Schweser 2015, CAIA, Hedge Funds & Managed Futures and core & Integrated topics, page 373.