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The Alter-NATIVE series How Alternative Investments help in managing portfolio risk

How Alternative Investments help in managing portfolio risk

Alternative investments can be a good way to diversify portfolio risk.
Edelweiss Feature Sep 26, 2017

1) Systematic or Market Risk and 2) Unsystematic Risk. Systematic risk factors are those which are usually beyond an investors’ control and thus cannot be easily eliminated with traditional investments. Traditional investments like stocks and bonds usually have a strong correlation with market trends. What this basically means is that their return profile mirrors that of the market. In a positive market these investments will do well while in a negative market they will underperform. Unsystematic risk on the other hand is directly correlated to the performance of the particular asset. These can be diversified by investing across geographies, sectors and instruments. However, investors who choose to invest only in traditional assets will always be left with some amount of systematic risk.

In that regard, alternative investments can be a good way to diversify portfolio risk. Most alternative investments display a low correlation to traditional assets and do not move in tandem with market trends. Due to low or negative correlation to traditional assets, alternative investments can help to reduce the impact of market volatility and smoothen returns during periods that are turbulent for traditional investments. Hence, every time that the market falls, it is not necessary that your investment in alternative investments will fall as well. The long term investment horizon and illiquid nature of these investments contribute to the different risk and return profiles of alternatives.

However, direct investment in alternative assets may not always be feasible for an individual investor. Alternative Investment Funds (AIFs) offer individual investors a great opportunity to invest in these assets and reap their diversification benefits.

 

Past performance is not an indication of future performance. Investments in the securities market are subject to market risk.

Please read the Private Placement Memorandum carefully before investing.

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