What are alternative investments?

Reality: Alternatives represent different approaches to investing across a variety of markets and vehicles. A useful way to think about alternatives is to differentiate between their “contents” – the assets or strategies that determine how individual investments might be expected to perform – and their “containers,” the fund structure that will determine transparency and access to capital.

Reality: Just as adding one stock or mutual fund does not lead to significant diversification, a single alternative investment may have limited impact. Investing in only one alternative strategy may provide some diversification benefits, but can also concentrate risks.

Reality: The liquidity of alternatives depends on the individual investment. Some alternative mutual funds provide daily access to cash. Limited partnerships, on the other hand, can have restrictions from 30 days to longer than 10 years.

Reality: Individual investors have greater access to alternatives than ever before due to innovations in product structures. Open-end mutual funds, for example, have no-or-low barriers to investing. Other structures, such as registered closed-end funds and unregistered funds, have some limits on who can access them.

Reality: It's true that correlations across nearly all investments tend to converge under periods of extreme market stress. Even during crises, however, history shows that alternatives typically have not fallen as far as stocks, providing a cushion for investors.

Reality: The fees for alternatives vary and depend on the fund’s structure. An alternative’s “container” usually indicates the fees an investor can expect to pay. Partnerships typically entail management and performance fees. Mutual funds charge a management fee but no performance fee.