Alternative investments have outpaced traditional investments since the Great Recession and, according to industry experts, are only expected to grow.
Alternatives can include private equity, illiquid types of investments and, in some cases, require investors meet minimum income and net worth requirements. But they’re not always among the more exotic investments, either. Investing in timber is considered by many to be an alternative investment, for instance.
Record low interest rates have forced investors and retirement plan sponsors to find new ways to get more out of their investments. That’s why the amount of money invested in alternatives has doubled since 2008.
See also: Insurers eye alternative strategies
In 2010, 34 percent of institutions had more than one-quarter of their portfolios in alternative assets, according to Morningstar. Research released last year showed 78 percent of all advisors were using alternative investments in their client portfolios.
Public pensions are among the bigger players in alternatives.
For example, the New Jersey Division of Investment, which manages investments for the $75.3 billion New Jersey Pension Fund, announced last month it will invest or commit up to $801 million in five alternative investment funds.
In North Carolina, State Treasurer Janet Cowell recently asked the legislature in her state for additional flexibility in allocating assets in the state’s investment portfolio. She asked to increase to 40 percent from 34 percent the amount the state’s pension plan is allowed to invest in alternatives.
The big reason for the request is that the state’s portfolio has a “higher than desirable allocation to publicly traded stocks, which is a problem given the danger of large equity market declines,” Cowell said in a statement.
Meanwhile, Morgan Stanley Alternative Investment Partners in mid-May announced the launch of its AIP Dynamic Alternative Strategies Fund, its first-ever mutual fund aimed at offering investors a “sophisticated, one-step means of accessing a broad range of alternative strategies that may complement traditional equity and fixed income investments.”
A recent survey of 300 individual investors by EverBank found that 52 percent were looking outside traditional U.S. equities in hopes of finding better performing investments this year. Of those, 21 percent were looking at precious metals, and 21 percent were looking at international equities. Seven percent were bullish on currencies, and 3 percent liked international fixed income.
“The reality is diversification is not as difficult or complex as many people believe, and we’re seeing a growing awareness of the importance of building investment portfolios that include traditional U.S. equities, traditional fixed-income assets and a wide range of more nontraditional investment vehicles,” Frank Trotter, president of EverBank Direct, said in a statement.
Part of the growth in alternatives has stemmed from the defined contribution market, which now has access to some of the alternative strategies that were only available to pension plans and university endowments in the past, according to a DWS Investments white paper.
CMG Capital Management Group of King of Prussia, Pa., offers alternative investments through its CMG Family of Funds.
The company believes that through careful investment management, investors can achieve a better risk-adjusted return than through traditional buy-and-hold stock and bond investments.
“Hot money chases hot money because, behaviorally, they look at yesterday’s return and project it forward in a quick, get-rich-quick imprint in their mind,” said Steve Blumenthal, founder and CEO of CMG. “What we’re seeing is that the alternative portions of a portfolio are doing great.”
Blumenthal advocates for a 33-33-34 allocation split, with assets divided between equities, fixed-income and alternative investments.
Many people believe their portfolios are diversified if they have a mix of small, mid- and large-cap funds and bonds, but all of these investments are tied closely to the markets. If inflation goes up and markets go down, all of a person’s investments are “floating down the river at the same speed,” said Anton Bayer, CEO of Up Capital Management in Sacramento and San Jose, Calif.