It’s not only music lovers who venture beyond the mainstream to tune in to alternative offerings. Main Street investors in search of diversifiers, shock absorbers and risk reducers for their portfolios should also consider owning a small sliver of alternative investments, or ones that differ from plain-vanilla asset classes such as stocks, bonds and cash.
Access to “alt” investments, such as hedge funds, private equity, venture capital and the like, is still restricted mainly to “accredited” investors, or wealthy investors who meet Securities and Exchange Commission requirements, such as having a net worth of more than $1 million (not including a primary residence) or annual income of more than $200,000 (or $300,000 including a spouse).
Alternative offerings available to accredited investors face less regulatory scrutiny (which means they have fewer investor protections). They also tend to include private companies and asset classes that don’t trade on public exchanges and employ more-sophisticated strategies.
For instance, private equity refers to investments in companies that aren’t publicly traded. Hedge funds can use borrowed money to amplify returns, and they can sell stocks short, betting on a price decline, which gives them the ability to make money in down markets. Alternative investments are less liquid, which means they’re harder to buy and sell quickly. And they typically require a longer holding period to realize profits.
But you don’t have to be an accredited investor to invest like one. Mom-and-pop investors can gain exposure to investments that mimic the strategies and performance of alt investments via exchange-traded funds and mutual funds.
“The industry is becoming more democratized,” says Tom Kehoe, managing director and global head of research and communications at the Alternative Investment Management Association.
Consider alternative-type investments as a way to provide greater portfolio diversification, add protection in falling markets, cut down on volatility, and generate higher yields and more-predictable income streams. But limit alts to 10% to 20% of your overall portfolio, says David Jamison, a certified financial planner at Charles Schwab.
The investments below might be more arcane – and risky – than the stocks and bonds that form the core of your portfolio, but they are accessible and provide the benefits of alternatives. (Prices and other data are through Dec. 3.)
Metals (such as gold and silver), energy (such as oil and gas) and agriculture assets (such as wheat and farmland) are investments that don’t rise and fall in tandem with stocks and bonds – and they perform well in times of rising inflation.
One of the largest commodity ETFs is Invesco DB Commodity Index Tracking Fund (DBC, $20, expense ratio 0.85%), which uses futures contracts to track an index of 14 of the most heavily traded physical commodities. In the past year, the fund has gained 39.5%, topping 90% of its peers.
Convertible bonds …….