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.
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.
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.
“You have to take a different model of diversification,” Bayer said. “What we have done over the last five years is added sector funds, isolated to particular industries’ financials, like energy, and combined that with asset allocation funds that are risk-based.”
There's another good reason to be careful about alternatives: they require close monitoring.
Last month, the Financial Industry Regulatory Authority Inc. imposed a $550,000 fine against VSR Financial Services Inc., a midsize broker-dealer, for not adequately watching over concentrated client positions of alternative investments.