Alternative Investments - How Do They Fit In Your Portfolio

Alternative investments — any investments in asset types beyond the traditional three: stocks, bonds and cash — have become an increasingly common addition to investors’ portfolios. That’s because it has become harder for investors to achieve broad diversification, says Steve Wyett, Private Wealth Chief Investment Strategist for BOK Financial, the parent company of Colorado State Bank and Trust.

The reason, he says, is that the performance of different types of stocks and bonds has grown more similar over the years. For example, investors who have both domestic and international stocks in their portfolio won’t see the same level of diversification today as they would have 15 or 30 years ago, because the U.S. and international markets overall have become more closely aligned.

“Given this trend, we see more investors turning to alternatives,” Wyett adds. “Adding alternatives to a portfolio helps manage risk and increases diversification.”

While adding alternatives to a portfolio has several benefits, investors must proceed carefully. There are many types of alternative investments, each with its own considerations and risks.

Types of Alternatives

There are many different types of alternative investments, but common ones include:

  • Real estate: Commercial or residential properties
  • Private equity: Ownership of shares in privately held businesses
  • Master limited partnerships (MLPs): Tax advantaged, publicly traded companies that own pipelines, storage tanks, and other cash-generating energy infrastructure
  • Real assets: Energy, commodities, timber and other infrastructure
  • Hedge funds: Pooled funds that use a range of strategies used to bolster performance and diversification. A “long/short” strategy, for example, involves taking long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decrease in value.

Understanding the Risks

Although intended to reduce overall portfolio risk, alternative investments can introduce new risks that must be considered. For example, they are less liquid than many investments, may use higher-risk “leveraging” strategies to seek better returns, may have less investor transparency and may have fewer managers overseeing them than your typical mutual fund. Certain alternative investments, such as commodities, can also be more volatile and prone to large price swings.

Due to these risks, most investors keep less than 20% of their portfolio in alternative investments, Wyett says. And some investors may not be comfortable with more than a small percentage invested in alternative investments.

Choosing Wisely

Given the broad range of alternative investments available, investors should work with a knowledgeable investment advisor who can help them assess their portfolio and determine which alternatives are a good fit for their goals and needs.

There are more options for accessing alternatives than ever before, Wyett says. In the past, an investor might need to invest at least $100,000 or even $1 million to access certain types of alternative investments. Today, however, an increasing number of mutual funds and exchange-traded funds (ETFs) offer low-cost and easy access to a wide range of alternatives — from commercial real estate to commodities to private equity.

Colorado State Bank and Trust’s Alternatives Experience

Colorado State Bank and Trust has a seasoned team of professionals to design and manage portfolios of alternative assets. A team of investment professionals is dedicated to hiring asset managers who are specialists in specific alternative strategies. The team also performs active and intense due diligence to help minimize risk so that managers and their portfolios meet our clients’ needs.

“We have the resources committed to the oversight process, to the due diligence process involved in finding these alternative-asset managers, to following them on a regular basis, and to making assessments of how they’re doing,” Wyett says. “As a $31 billion financial services company we are able to build portfolios that give our clients the opportunity to work toward their long-term financial goals.”

Alternative investments are subject to the risks related to direct investment in real estate, stocks, bonds, ETFs, convertible securities, preferred stocks, MLPs and other financial instruments. These investments are more volatile and carry more risk than other investment types. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE