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Alternative Investments And Risk Reduction

According to the Financial Planning word, normal investment assets include Cash, Fixed Interest, Bonds, Equities, Property and Infrastructure. Anything else is considered an "alternative" investment.

It does seem funny what we hear in the media about Gold, Crude Oil, Wheat, etc., are really alternative investment assets - and outside of what a Financial Planner is allowed by Government regulation, to recommend.

Alternative investments include long/short strategies, market neutral, hedge funds, private equity, foreign exchange and commodities. These types of investments used to be the domain of the wealthy investor or institutions only. Access is now available to everyday investors to include these investments in their portfolio.

These types of investment assets are not wild and risky, as most governments will make them out to be.

Having a percentage of your portfolio in these types of assets can in fact increase your returns and decrease your risk.

Yes, risk and return is not dependant, as most in the media will make them out to be. This is old thinking. But this is a topic for another article.

Alternative assets are great to support diversifying your portfolio. A concept call the Modern Portfolio theory and Efficient Portfolio can be used to demonstrate that by adding alternative assets to a portfolio, the returns can increase and risk can reduce. Nothing is guaranteed of course.

Take the diagram above where a small allocation is made to a market neutral alternative investment to an existing stock and bond portfolio.

Risk or volatility is reduced and returns are increased.

Murray Priestley - Chairman of Alpha Asset Managers, a provider of sophisticated fund management and trading systems to regulated investment managers and institutions around the world.. Alpha is a market neutral specialist that provides management and software services for professional and institutional investors. For more information, www.alphamgrs.com