A diversified portfolio is an excellent way to spread risk across a variety of different investment types so that if one gets hit, the others can offset the loss. Having a mix of investments, such as bonds, equity funds, and cash, can help you feel prepared for a volatile stock market or even a recession. But to truly maximize your portfolio, it is vital to understand alternative investments.
An alternative investment is a financial asset that is not stocks, bonds, or cash. They are typically illiquid and often unregulated. Alternatives used to be only available to high-net-worth or institutional investors but are now available to retail and individual investors via platforms that have created feeder funds, reducing the minimums for access.
The alternative investment industry is growing more now than ever before because investors are looking for more asset classes with lower correlations - a measurement of how two securities move in relation to each other. The lower the correlation, the less likely the two will react the same way during an economic downturn or upswing.
Many consider alternative investments riskier than traditional investments, but they can have a greater opportunity for reward. Due to their illiquidity, alts typically have longer investment timelines than traditionals, and this is a good reminder to know where you are in the life cycle of an investor.
Alternative investments are attractive because they have a low correlation with traditional investments. Often they perform better during a market downturn and could reduce exposure to certain types of risk. Conversely, they are more complex and often have higher risk profiles and longer investment timelines. Working with an experienced financial services professional can simplify the process of finding alternatives to invest in and building and monitoring the portfolio.
Alternative investments are considered by many to be risky and illiquid, but they can offer more attractive returns than a traditional approach. A mix of both types of investing is what many sophisticated investors now seek. The hybrid model is a popular choice for cars, golf clubs, and even puppies. A hybrid of more than one type of investment vehicle can be just as attractive, especially when market conditions are unpredictable at best.
A great comparison can be made with nature. When conditions change in a given environment, such as pollution or rising ocean temperatures, many plants and animals adapt to those changes to survive. Interestingly, in the animal world, hybrids are very rare, but scientists studied geographical regions where hybrids were naturally occurring. By the early 1990s, researchers found that ”hybridization was a valid mechanism of evolutionary change - one that could radically influence an animal’s ability to adapt to its environment.” The Scientist-May 2021
A hybrid is indeed an evolutionary survival tool. Adapting to a changing investment landscape is compelling, given the recent emergence from over a decade of quantitative easing and an uncertain future.
Investors are looking for customized programs that can offer steady returns and peace of mind. Professional firms and some investment advisors can offer to manage accounts that incorporate a hybrid model.
A separately managed account is highly customizable and is comprised of stocks, bonds, and cash. These types of mixed investments offer greater insight and transparency, tax smart planning, and risk-managed diversity. SMAs can be structured to include a diverse range of investment options within a risk-managed framework. They can have liquid strategies blended with hedging- bringing higher lows and lower highs- and a more manageable stress level for the investor.
Vineyard Global Advisors offers 12 fee-only, actively managed, including hedged and long-only investment strategies via separately managed accounts.
If adaptation is the way that nature will survive an ever-changing environment, it is worth transitioning your own approach to investing in this fast-moving and evolving investment landscape.
Discuss a hybrid investment model with one of our Vineyard Global Advisors.
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