Specialized Funds: Alternative
Alternative mutual funds can provide access to a wide variety of investments and investment strategies, such as absolute return, market neutral, and commodity and currency-related funds.
Reasons to consider alternative funds
- Tend to react differently to changing market conditions than traditional stocks and bonds, providing potential for diversification
- Potential to enhance a portfolio's risk/return profile
Alternative investments can provide unique benefits to your investment portfolio by diversifying exposure away from traditional asset classes, such as fixed income and equities. That’s because alternative investment strategies—like absolute return, market neutral, and commodity and currency-related funds—do not move in tandem with more traditional asset classes.
Investors often think of alternative investments as a single asset category or strategy. In reality, alternative funds provide access to a wide variety of investment strategies and types of investments that cross asset classes. These types of funds can broaden your diversification opportunities and potentially widen portfolio correlations.
As part of a carefully constructed portfolio, alternative investments may provide above-average returns and potentially reduce your overall portfolio risk since they invest in areas more traditional investments cannot, like unlisted securities and leveraged loans.
Understanding the risks of alternative funds
Investors should be aware of the unique risks associated with these types of funds. Alternative investments are often less liquid, especially during periods of market stress. Since they tend to be complex investments with potentially complicated tax implications, they are best suited to a sophisticated investor.
Although alternative investment funds may be highly diversified, this diversification may lead to a flattening of returns and less transparency in portfolio holdings. Furthermore, since many alternative investment funds are newer products, they may have a limited performance history. In addition, these funds may have higher operating expenses when compared with traditional mutual funds and as a result, over time, these fees could detract from long-term returns.