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Why Investors Utilize Alternative Investments

Alternative investments are nontraditional assets not typically included in a traditional 2-D stock-and-bond portfolio.

Generally, investments other than publicly traded stocks, bonds, and cash may be classified as alternative investments. Common examples include real assets, private equity, private credit, and hedge strategies.

By allocating alternatives to your portfolio, you are creating a 3-D portfolio based on the Endowment Investment Philosophy^®, which can expand your diversification and may enhance long-term risk-adjusted returns.

Types of Alternative Investments

Real Assets

Real assets - such as real estate, commodities, and natural resources - are physical or tangible assets that derive value from their intrinsic characteristics. These assets have at times been used as a potential hedge against inflation.

Private Equity

Private equity refers to ownership in private companies that are not publicly traded. Because a large portion of U.S. businesses are privately held, private equity investments can offer access to segments of the economy not reflected in public markets.

Hedge Strategies

Hedge strategies seek to reduce market risk or capture value through specialized investment techniques such as shorting, arbitrage, or tactical asset allocation. These strategies may behave differently from traditional equity or bond investments and are often complex and involve unique risks, including the use of leverage and derivatives.

Benefits of Alternative Investments

Diversification

Alternative assets with a low correlation to traditional stocks and bonds can provide additional diversification to your portfolio. "Diversification is the only free-lunch in finance"* - Harry Markowitz

Market Inefficiencies

Private markets may offer a broader set of opportunities not typically available in public markets. Because they are less regulated and less widely followed, skilled managers may be able to identify unique or inefficiently priced investments.

Potential for Increased Income

Certain alternative investments such as income-generating real estate, may offer cash flow that supplements traditional income sources.

Long-Term Focus

Private companies generally are not subject to the same public quarterly-reporting requirements as exchange-listed companies, which may provide greater flexibility to pursue longer-term objectives.

Illiquidity Premium

Because alternative investments don't allow you the ability to exit or rebalance at any time, some, but not all, private market investments have historically delivered an "illiquidity premium" - or higher returns in exchange for longer lock-up periods.

Volatility Management

Some alternative investments may have lower correlations to traditional stock and bond markets. This can potentially contribute to portfolio diversification and help smooth returns over time.

Broader Opportunity Set

Access assets, managers, or strategies that may be unavailable or difficult to access in public markets. Access earlier stage growth and participate before companies reach public markets and potentially capture more of a company’s growth phase.

Risks of Alternative Investments

Less Regulation

Alternative assets are not subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors.

More Risk

Alternative assets are speculative and involve a high degree of risk. Investors could lose all or a substantial amount of their investment.

Illiquid

Interests may be illiquid and there may be significant restrictions in transfer. There is no secondary market for interests, and none is expected to develop.

Leverage

Alternative assets may be leveraged, and their performance may be volatile.

Tax Complexity

Alternative assets may involve complex tax structures, and may cause delays in important tax information being sent to investors.

High Fees

Alternative assets may involve higher or more complex fees and expenses than traditional investments.

Conflicts of Interest

Alternative assets and their managers/advisers may be subject to various conflicts of interest.

Concentrated Positions

Alternative assets may hold concentrated positions with a limited number of investments.

*Diversification does not ensure a gain or protect against loss in a declining market.

The information on this page is for general informational purposes only and should not be considered personalized investment, legal, or tax advice. This material does not constitute an offer to sell or a solicitation of an offer to buy any security or investment product. Any such offer will only be made through official offering documents and only to qualified investors. Investing involves risks, including, but not limited to long-term investing risk, illiquidity, higher fees, complex tax treatment, lack of transparency, and potential loss of capital. Diversification does not ensure a gain or prevent a loss in a declining market. Global Alternative Investment Management is not making any specific recommendations that investors should or should not participate in investments. Investors should always consult with a registered investment adviser and tax accountant to determine if any particular investment and its corresponding tax impact is appropriate for their personal circumstances. For additional disclosures on alternative investments click here.

“Endowment Investment Philosophy®” is a registered trademark of Endowment Wealth Management, Inc. (“EWM”), an affiliate of Global Alternative Investment Management LLC under common ownership. References to the Endowment Investment Philosophy® describe a general investment framework and do not imply that alternative investments are appropriate for every investor, will improve diversification, or will enhance returns. Investment suitability depends on each investor’s objectives, existing holdings, risk tolerance, liquidity needs, tax circumstances, and other considerations.