5 MINUTE READ

What are alternatives?

Alternative investments are financial assets that do not fall into more traditional categories like stocks or bonds. They can be a powerful tool for investors to create more resilient portfolios by diversifying from traditional investment vehicles and increasing potential returns.

While more investors are considering alternatives, some still view them as an exclusive, narrowly defined class of investments. This is far from the truth. Alternatives include a wide range of assets, strategies and vehicles, including private equity, private credit, real assets (real estate and infrastructure) and hedge funds.

Watch this video and learn more about alternative solutions.

WATCH TIME: 1min 30sec

Video Player is loading.
Current Time 0:00
Loaded: 0%

An alternative investment is a financial asset that doesn’t fall into one of the conventional equity, income or cash categories. 

At BlackRock we classify them into two types:

The first type are private vehicles that invest in non-traditional assets, such as private equity, private credit, infrastructure and private real estate. They are more complex and less frequently traded than public stocks or bonds and give investors access to additional sources of return.

Hedge funds, the second type, operate mainly in public markets and invest in traditional assets using non-traditional methods, such as short-selling and leverage.

Alternative Investments look to:

Exploit inefficiencies in markets by focusing on non-traditional assets and investment strategies characterized by potential illiquidity

Invest in assets in private and public markets

Provide low correlation to markets

Invest with active ownership and a focus on driving terms

Alternatives can be a powerful tool to boost returns in a low rate environment, generate income, achieve greater diversification than traditional investments and dampen volatility. 

An alternative investment is a financial asset that doesn’t fall into one of the conventional equity, income or cash categories. 

At BlackRock we classify them into two types:

The first type are private vehicles that invest in non-traditional assets, such as private equity, private credit, infrastructure and private real estate. They are more complex and less frequently traded than public stocks or bonds and give investors access to additional sources of return.

Hedge funds, the second type, operate mainly in public markets and invest in traditional assets using non-traditional methods, such as short-selling and leverage.

Alternative Investments look to:

Exploit inefficiencies in markets by focusing on non-traditional assets and investment strategies characterized by potential illiquidity

Invest in assets in private and public markets

Provide low correlation to markets

Invest with active ownership and a focus on driving terms

Alternatives can be a powerful tool to boost returns in a low rate environment, generate income, achieve greater diversification than traditional investments and dampen volatility. 

Why should investors in Latin America take note?

The market is not the same as it was a decade or even two years ago. Bond yields are near record lows, and the stock market is near record highs, amid heightened volatility. A traditional 60/40 portfolio (60% equities and 40% bonds or other fixed-income offerings) is no longer poised to keep up with today’s reality. Investors must adopt new strategies to build resilient portfolios for the long term

In Latin America, alternative investments are gaining ground as investors look to keep up with this new market regime and mitigate risks, such as inflation – which came in at 10.6% in the region in August 2021.1

Quotation start

With volatile equity markets and bond yields near record lows, alternatives can have an increasingly important role to play as clients in Latin America look to enhance returns, reduce risk and build portfolio resilience. We believe that the allocation to private markets in wealth portfolios should increase from 5% today to 20% over the next several years.

Quotation end
Roque Calleja, Head of BlackRock Alternative Specialists (BAS) for Latin America Roque Calleja Head of BlackRock Alternative Specialists (BAS) for Latin America

Core terminology

  • 01

    Private vs. Public vehicles

    Alternative investment vehicles can be found in both public and private markets – although the majority are found in private markets, unlike the stock market which is public.

  • 02

    Liquid vs. Illiquid assets

    Liquidity is the ease with which an asset can be converted to cash without affecting its selling price. With alternative investments, liquidity varies on the product type. When building an alternative investment strategy, consider both liquid and illiquid assets to build diversified portfolios that can withstand market environments.

  • 03

    Open-end vs. Closed-end funds

    The primary difference between these two funds is how investors access them, and their ability to invest in private markets.

Paragraph-3,Multi Column Teaser-1,Paragraph-4
Paragraph-5,Image Cta-1
Paragraph-6

Learn about the key differences between public and private market vehicles

What are public market vehicles?

Public market vehicles operate in the public market like stocks and bonds but use less traditional tools such as short selling and leverage.

Asset categories: hedge funds and liquid alternatives.

What are private market vehicles?

Private market vehicles have less liquidity than public stock and bonds and give investors access to additional sources of return through the investment in non-traditional assets.

Asset categories: private equity, private credit, infrastructure, and private real estate.

Note: Private vehicles may have investor suitability requirements, capital calls, and performance fees.

Common alternative investment terms

Now that you know the core terminology, let’s recap:
Temple
Traditional investments
Strategies constructed primarily with public stocks and bonds.
Light bulb
Alternative investments
Investments that look to take advantage of inefficiencies in markets by focusing on non-traditional assets and investment strategies.

Traditional investments in focus

  • Highly liquid
  • Assets in public market
  • High correlation to markets
  • Passive shareholders
  • Returns driven by beta with lower dispersion among investors

Alternative investments in focus

  • Potentially illiquid
  • Access to private and public markets
  • Can help amplify returns over public markets
  • Active shareholders (at times solo owners)
  • Returns primarily driven by alpha with high dispersion among managers
Test your knowledge
Q. Why would investors use closed-end funds?

Sorry, that wasn’t the correct answer!
Why not try one more time before hopping to the next module?

The correct answer is
Repalced with correct answer - This concludes Module 1.

Well done, that was the correct answer!
This concludes Module 1.

Dive into Module 2

Crayons on charcoal