• This article explains how alternative investments are gaining popularity for the diversification and hedging capabilities they offer.
• The information is aimed at asset managers seeking to build portfolios that can withstand any type of economic cycle.
• FlexFunds offers an asset securitization program designed to improve the liquidity of many alternative investments. For more information, feel free to contact our experts.

Due to periods of high volatility that global economies may experience, asset managers are increasingly considering the inclusion of alternative investments in their own or their clients’ portfolios. But why are these investments so important?

What are alternative investments?

First, it is essential to understand what alternative investments are. Fortunately, their definition is quite straightforward.

Alternative investments refer to any financial assets that do not fall into traditional investment categories such as stocks, bonds, or cash.

“Some investors see alternative investments as a way to hedge against inflation and build wealth outside of the traditional financial markets. The opportunity for diversification and higher returns is also appealing,” explain experts at Goldman Sachs.

For these reasons, alternatives continue to gain popularity. In fact, according to the financial firm KKR, the industry is expected to grow from USD 15 trillion in 2022 to over USD 24 trillion by 2028.

Types of alternative investments

Now that the question of what alternative investments are has been answered, we can move on to the second part. Much of the industry’s potential lies in the wide variety of alternative investments that exist, among which the following stand out:

Hedge funds

Hedge funds are actively managed collective investment vehicles that aim to “beat the market.”

Essentially, hedge fund managers pool capital from multiple investors—typically institutional or high-net-worth individuals—and channel it into less conventional strategies.

The distinctive feature of these investments is that they offer clear advantages over traditional financial instruments.

That is, they use financial derivatives and/or a high concentration of assets to generate returns higher than a chosen benchmark market. And when the general market trend is bearish, these funds aim to reduce losses.

Venture capital

Venture capital is another highly popular form of alternative investment due to its potential to generate attractive returns.

In this segment, investors allocate funds to new companies with strong short-term growth prospects—usually privately held firms.

If the investment succeeds, those companies can grow exponentially, and the invested capital multiplies substantially. In fact, many of today’s major corporations began as small ventures backed by venture capitalists.

Real estate

Among the most widely used alternative investments by asset managers are real estate assets.

This category includes residential and commercial properties, real estate developments, and even publicly traded real estate investment trusts (REITs).

In most cases, real estate assets not only provide a hedge against inflation but also generate periodic income that helps reduce overall portfolio volatility.

Commodities

Many asset managers also choose to trade commodities of various kinds as a way to diversify beyond traditional bonds and equities.

Some commodities depend on climate and geography, such as soybeans or wheat; others are closely tied to geopolitics, like oil; and some have historically served as “safe-haven assets,” such as gold.

The inclusion of each commodity type will depend on the objectives of:

• The managers.
• Their clients.
• The overall portfolio composition.

Alternative investments and economic volatility

The most important aspect of alternative investments is that they increase the likelihood of achieving neutral or even positive returns when global stock markets are in turmoil.

A clear example occurred in 2022. When inflation surged globally due to excessive monetary issuance following the pandemic, the U.S. Federal Reserve (Fed) was forced to raise interest rates.

In response, stocks around the world plummeted, as did bonds—making it one of the worst years for markets. However, alternative investments such as commodities served as a hedge.

“Public assets struggled as the Federal Reserve tightened interest rates to combat rising inflation. Commodities stood out as one of the few public market assets that generated positive returns. What also stood out is the positive return from a mix of alternative investments,” noted experts at JP Morgan.

That same year, according to consulting firm Aurum, the hedge fund sector fell by just 2.4%, while the S&P 500 declined by more than 18%.

Currently, however, amid the ongoing conflict between Russia and Ukraine, instability in the Middle East, and the U.S.–China trade war, gold has emerged as a clear winner.

For instance, over the past twelve months alone, the precious metal has surged 47% to around USD 3,400 per ounce. In comparison, the S&P 500 rose “only” 10%, while Treasury bonds appreciated less than 6%.

Securitizing alternative investments

It’s worth noting that regardless of the type of alternative investment chosen by the asset manager, it is possible to initiate a securitization process to create listed products (ETPs).

At FlexFunds, we not only develop cost-efficient bankable assets with their own ISIN/CUSIP codes but also provide:

• Stock exchange listing.
• Fund accounting.
• Back-office services.
• Net Asset Value (NAV) calculation.
• Corporate administration services.

To learn more about FlexFunds’ ETPs and our asset securitization program, please don’t hesitate to contact our team of specialists. We’ll be happy to assist you!

Sources:

• https://privatewealth.goldmansachs.com/us/en/inthelead/inthelead-read/what-are-alternative-investments1
• https://www.kkr.com/insights/alternative-perspective-past-present-future
• https://www.jpmorgan.com/insights/investing/investment-strategy/the-case-for-alternative-investments