Alternatives share a number of characteristics and objectives. However, it is important to recognize that there is wide latitude within the category of “alternatives.”
A useful distinction
One useful way to compare alternatives is to consider their "contents" and "containers."
Contents can be either the assets themselves (e.g. currency or real estate) or the investment strategy employed (e.g. long/short strategy or event driven strategy). Either way, the contents determine how individual investments might be expected to perform relative to traditional investments.
Containers define the vehicles in which investments might be found, such as hedge funds, private equity funds and mutual funds, all of which are structured differently for a variety of management, liquidity, legal and regulatory reasons. Hedge funds, for example, are categorized together because their goal is to mitigate (“hedge out") certain risks inherent in other asset classes, not because their contents are all the same.
Accessing alternative investments:
Contents versus containers
Thinking in terms of contents and containers can help you diversify your portfolio not only by investment type, but by investment vehicle. Different contents can help you mitigate risk in your portfolio and gain exposure to additional markets. Meanwhile, different containers can help you address distinct needs (e.g., liquidity, transparency, ease of access, etc.).
