Alternative Investments

Equity has remained, remains and will remain the favourite asset class amongst investors for obvious reasons, but equity markets have the characteristic of moving both sides and there is also a risk of investors losing out on their originally invested capital. It is highly unpredictable. Investors when start losing out on their original investment value, try to mitigate risk by averaging or adding more stocks. An additional exercise is to buy stocks spread across different geographies. Termed as diversification, it is traditionally regarded as the best way to mitigate risks arising out of concentration.

But with globalisation, fundamentals have now become integrated to a greater extent and the impact of one market is felt on others also. There is therefore a certain level of correlation that has developed amongst various markets, which leads to global sentiments. Therefore, investment in alternative asset classes in addition to diversification can be a good strategy, to maintain outperformance.

Alternative assets may be broadly defined as asset classes, which respond differently to factors that impact ordinary stock or bond investments. Investments avenues like real estate, private equity, commodities, gold, etc. can be included in the definition of alternative investments.

There should be alternative investment strategies built within portfolios, which on their own counterbalance the risks of concentration. Non-correlated assets can be allocated 5% to 10% of the total portfolio to protect the remainder from downside risk.

An example to state the above can be gold as an asset class within the total portfolio. Gold has a negative correlation to the ubiquitous US Dollar and is also a hedge against the prime concern of inflation. So, where a depreciating dollar impacts negatively to stocks in export oriented sectors such as IT, it has a positive impact on gold. Therefore, where an investor may see a fall in the price of his/her stocks, it is counterbalanced by an appreciation in the price of gold. Similarly in inflationary times, where currency loses its power, it is gold which acts as the hedge against that deprecating asset.

Conclusively, sound investing principles calls for not only returns but for risk adjusted returns. A sound investment would be looking at positive returns while protecting downside risk at the same time. Therefore, alternative investment, which may where look to dampen the positive returns in abnormally good times, helps to maintain returns in rough times.