Consider the Alternative.. Why Alternative Investments Have a Place in Your Portfolio.

Author:Hodari, Aaron

* Think about the characteristics that make a strong portfolio: diverse, cost-efficient, tax-efficient, risk-managed.

These qualities should be true of every portfolio, no matter the size or an individual's risk profile. The clients we meet with all want a portfolio that checks these boxes, but doing so is easier said than done.

This is why we often look to alternative investments. The world of alternatives provides access to unique opportunities that, when used correctly for the right investor, can help achieve the portfolio traits mentioned above.


The catch-all phrase of "alternative investments" is a bit of a misnomer, since it can mean different things to different people. Hedge funds are alternative investments, as are structured settlements and cryptocurrency assets (but that's a discussion for another day).

The reason we preach the value of alternatives to certain clients is because they can have a low correlation to the U.S. stock market, which comprises many investors' main risk exposure.

Achieving an asset mix with low correlations helps protect against downside and bouts of volatility, especially as traditional assets are becoming more correlated than ever. As BlackRock noted, alternatives took less heat during the dot-com crash and financial crisis compared to their mainstream peers.

On top of this, alternatives can generate higher rates of returns due to the wide scope of their investment universe. But of course, not all alternatives are created equal. With this in mind, there are two types of alternatives we feel make a strong case for portfolio inclusion: real estate and private debt.


Perhaps the most well-known type of alternative investment, real estate investing has become increasingly popular in recent years. We find real estate attractive in part for its returns. The average 20-year return of REITs (11.8 percent) residential real estate (10.6 percent), and commercial real estate (9.5 percent) all outperform the S&P 500 (8.6 percent).

The total equity market cap of the FTSE Nareit All REITs Index is over $1.1 trillion according to the National Association of Real Estate Investment Trusts, more than double the market's $438 Billion value in 2007. This growth is due in part to the increasing variety of REIT specializations and countless fin-tech platforms that have democratized access to the market, increasing investor exposure to the market.

However, the rising popularity of real estate...

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