Alternative investments are often included in portfolios because they can act as useful diversifiers. Investments in this category are outside those which fall into traditional asset classes, and the primary areas of investment are property, infrastructure, commodities and absolute return strategies. Other forms of alternative investment include land, forestry, works of art, antiques, stamps, wine as well as private equity and venture capital.
The lack of correlation of some these assets with traditional asset classes can serve to reduce risk within a portfolio as well as providing the opportunity for attractive returns when other forms of investments are performing poorly. Some alternative investment can be complex as well as being less liquid than some other asset classes meaning that they can sometimes be more difficult to sell.
Property: investment in commercial property provides exposure to a ‘tangible’ asset which entitles the investor to receive rental income as well as the opportunity for capital appreciation, both of which can be provide some protection from the impact of inflation. The primary drivers for the return achieved are supply and demand.
The usual form of investment in ‘bricks and mortar’ is purchasing shares or units in a property fund or property trust and these can provide exposure to a diverse range of different types of property including residential, retail, commercial and industrial buildings. Property can be one of the least liquid investments because of the time that it can take to dispose of a building, although this can be improved by investing through a collective fund or trust. Investing in collective funds which invest in the shares of property companies can significantly increase liquidity but the volatility is more akin to that of equities, particularly over a shorter investment period.
Historically, returns from property have been higher than cash and bonds but lower than equities.
Infrastructure: this usually encompasses investment in buildings (hospitals, schools etc.) and transport (bridges, tunnels, roads, railways, and airports) in the form of a public private initiative where government and private enterprise come together to develop projects for the benefit of society. These investments are attractive because they generally offer high and growing income yields and are usually accessed through collective funds or trusts.
Commodities: this area of investment is split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.). The prices of commodities can exhibit significant volatility and investment using a collective fund helps to spread the risk.
Absolute return strategies: the managers of these investments employ different strategies and sophisticated techniques to produce a positive return regardless of the direction and the fluctuations of capital markets. Hedge funds are one form of this type of alternative investment.