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

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.

Private vs. Public vehicles Liquid vs. Illiquid assets Open-end vs. Closed-end funds
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

Learn about the key differences between liquid and illiquid assets

What are liquid alternatives?

Liquid alternatives aim to provide diversification and downside protection within a portfolio when markets are stressed – such as hedge funds.

What are illiquid alternatives?

Liquid alternatives are traded less frequently or with low volume, making it harder to observe returns. Given the difficulties of selling and valuing illiquid investments, many investors demand a risk premium.

Extra credit for alts gurus

While some investors may avoid illiquid investments, others specifically increase their allocation to illiquid investments to earn this risk premium. It is about finding the right balance and making sure you can tolerate a certain level of illiquidity.
Graduation

Learn about the key differences between open and closed-end funds

Open-end funds (OEFs)

Daily liquid open-end funds, such as mutual funds are easily accessible by the broad market and can offer differentiated return streams versus traditional markets.

Main features:

  • Daily liquidity/trade execution (priced at end of trading day.)
  • Easy to access - continuously offered.
  • No investment minimums or suitability.
  • Diversified access to specialized strategies or markets.

Closed-end funds (CEFs)

There are two types of CEFs:

Listed CEFs – housed on a major exchange (NSYE) and offer intra-day (real time) liquidity.*
Non-listed CEFs - (interval funds) offer continuous subscriptions and regular (typically quarterly) liquidity.
Both types of CEFs offer investors simplified access to private markets versus traditional private funds.

Main features:

  • Efficient structure: “closed” structure allows for greater flexibility in the types of investment strategies that can be used and helps portfolio managers stay invested for the long term without forced selling.
  • Access to private markets: access to less liquid and private investments in a differentiated structure to seek higher income and return. Unlike private funds, there are no performance fees.
  • More liquidity than typical private funds.
Test your knowledge
Q. Replaced with twoUkQuestion

Sorry, that wasn’t the correct answer!
 Repalced with twoUkFirstAtempt

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

Well done, that was the correct answer!
 Replaced with twoUkAtemptSuccess

Dive into Module 2

Crayons on charcoal