Why are Alternative Investments Becoming More Popular?

What are Alternative Investments?

Alternative Investments are a type of investment tool that unlike stocks, bonds, and cash, do not explicitly trade through public markets. There are two main categories of these investments. Private assets are comprised of private equity, private credit, infrastructure, and private real estate. Hedge funds are the second type, which use less traditional forms of trading to generate high returns.

What are the factors that are driving the growth in popularity?

In 2022, the global investing landscape is filled with uncertainty and low returns. The ideal portfolio method of diversification throughout different public asset classes no longer satisfies all investor return expectations. With this in mind, investors are eager to find new opportunities to have higher returns. This is where alternative investments could help meet their goals.

The two major factors for popularity growth of alternative investments right now are geopolitical instability and the current state of inflation. With potential large investments being halted or disrupted by the war in Ukraine or the COVID-19 pandemic market volatility, investors need to find "safe havens" that generate returns while being more predictable. In some areas of the world, investors receive returns lower than the current inflation rate. No where would an investor find this satisfactory and therefore will need an asset class that will protect them against market risk. Investors now plan for higher inflation in the future. No one can guarantee anything when investing, and no one can state alternative investments are "safe haven" investments. Everything has risk, but here are the characteristics that make alternative investments more attractive given the state of public market volatility and inflation.

1. Most alternative investments are inversely correlated with markets.

2. The illiquidity of alternative investments can protect investors from market drops and panic selling.

Amidst the COVID-19 pandemic, markets fluctuated while investors experienced some of the lowest days witnessed since the 2008 recession. I recall the first couple of weeks when the pandemic started and the majority of my colleagues were selling off their portfolios in a panicked effort to keep their cash safe. Not only did they have to worry about the stock market fluctuating, they had to predict inflation rising. This lowered their portfolio's value once again. The value of illiquidity from alternative investments shed light on how investors could protect themselves from global panic. With this in mind, new opportunities from emerging markets in Asia and Latin America are boosting the current popularity of alternative investments as investors now plan for the future of inflation and market fluctuation.

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Written By:

Benedict Ramsbottom,

CMO