Alternative investments continue to be discussed in great detail but it’s important to have at least a basic understanding of what they are before you form an opinion or make a decision. I hope this helps.
Todd White and Paul Mumma of Columbia Management recently published the following in the 2012 Perspectives publication put out by their firm. It’s a simple look at an often misunderstood investment class.
“The word “alternative” implies something that is chosen instead of the “other” option. In this case, the “other” is whatever most investors typically do. Alternatives are investments that are in some way different from traditional investments (stocks, bonds and cash). Importantly, the investments that are considered alternative can change over time, as certain strategies become generally accepted as “non-alternative” and become part of most core portfolios. A good example of this is emerging markets equities, which were once thought of as esoteric but have now become commonplace.
Broadly speaking, most alternative investments fall into two categories:
1. Strategies that seek to invest in traditional ways (buy and hold) but in asset classes that are alternative to stocks, bonds and cash.
2. Strategies that may invest in either traditional or alternative assets but do so in an alternative manner.”
Due to deviating from the “norm”, alternative investments involve substantial risks and are more volatile than traditional investments, making them more suitable for investors with an above-average tolerance for risk. Alternative investments should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of them may accelerate the velocity of potential losses.
Until next week,
Susan R. Linkous