Advanced Strategies & InstrumentsIntermediate📖 8 min read

Alternative Investments

Diversification is real — but only if you price liquidity and fees correctly.

Main benefit
Different risk drivers vs. stocks/bonds
Main cost
Illiquidity, fees, and complexity
Key question
What risk is this actually paying me for?
Common mistake
Assuming correlations are stable

Alternatives are assets outside traditional public stocks and bonds. They can diversify a portfolio, but the main trade-offs are liquidity, fees, transparency, and complexity. The goal is not to collect exotic assets; it is to improve risk-adjusted outcomes.

Table of Contents

What Counts as an Alternative

Alternatives (Alt Assets)
Assets such as real estate, commodities, private markets, and certain strategies that have return drivers different from broad public equities and bonds.
Liquidity Premium
The extra return investors demand for locking capital up. If an investment is illiquid but does not compensate you, it is not a premium — it is a penalty.

Two Misconceptions to Avoid

Misread #1: "Non-correlated means always defensive"
Misconception
If it’s different from stocks, it will protect me in drawdowns.
Better Frame
Correlations can change under stress. Some alts diversify in normal times but behave like risk assets during liquidity shocks.
Misread #2: "Complexity creates return"
Misconception
A complex product must be sophisticated and therefore higher-returning.
Better Frame
Complexity often hides fees and risk. Ask what the strategy systematically does, and when it loses.

A Practical Allocation Checklist

Before you add an alt asset

  • Define the role: inflation hedge, income, crisis protection, or diversification.
  • Check liquidity: how fast can you exit, and at what cost?
  • Understand fee stack: management fees, performance fees, and hidden costs.
  • Stress-test the story: when does this fail, and what will you do then?
Checkpoint
Which question best validates an alternative investment's value to your portfolio?

Key Takeaways

1

Alternatives can diversify, but liquidity and fees often decide the outcome.

2

Do not rely on static correlations; stress changes behavior.

3

Choose alts for a clear portfolio role and a compensated risk.

Related Terms

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