What is an Alternative Asset?
At the forefront of the rapidly developing global economy, alternative assets have taken center stage for wealth managers demanding sustainable long-term and profitable stores of wealth. According to a report published by the asset management team at pwc, alternative investments are expected to grow to $15.3 trillion in 2020. The report describes three factors that motivate the expanding market:
- Projected emergence of 21 new sovereign investors, with majority coming from South America, Africa, Asia, and the Middle East
- Government incentivized shift to individual retirement plans
- An increase of HNWI from emerging populations
Alternatives cater to this new investor pool that seek both wealth preservation and positive returns. Typically, traditional investments can either protect or grow wealth, so what exactly is an ‘alternative’ investment and how can it do both?
According to BlackRock, a common myth is that alternative investments are their own asset class, when in fact they simply represent different approaches to investing across a variety of markets and asset classes. Alternatives are investments with a low correlation to traditional markets, but not limited to specific assets. To help clarify, BlackRock suggests that investments can be classified as alternative because of their ‘containers’ or their ‘contents.’ Certain investments, such as fine art, real estate, and gold are truly alternative assets because they have little relation to the performance of traditional stock or bond markets. Their ‘content’ classifies them as alternative. Hedge funds, retail funds, and private equity funds fall under the ‘container’ category because they use alternative investing methodology to achieve returns with low correlation to tradition fixed income markets. While these funds can include truly alternative assets, they are not limited to them. By using big data, mathematic algorithms, and indices, these funds can offer an alternative to investing in even the most traditional markets.
Both categories can be used as portfolio diversifiers because of their potential to reduce overall volatility. An alternative investment, by definition, performs with low correlation to the tradition stock market. For example, in a portfolio that is composed of mostly stocks and bonds, exposure to alternatives would hedge the risks of the general market. This helps explain why the performance difference between alternative and traditional investments is pronounced during times of economic stress. Under normal economic circumstances, a basket of alternatives in the long-term can expect to realize greater or similar returns to the stock market, often with the benefits of lower volatility. During economic recessions, however, alternatives historically outperform the stock market because alternatives are less exposed to overall market performance.
Read about how “Fine Art as an investment class has outperformed the S&P 500 every year for the last 10 years” here.
In a recent report published by McKinsey, director of McKinsey’s Toronto office, Pooneh Baghai explains that the growing population of HNWI will bring an unprecedented variety of portfolio types to the global economy. To accommodate specific needs of these portfolios, asset managers will turn to alternative investments that focus on specific outcomes. For example, fine art and real estate funds can protect income against inflation or defeat market volatility during times of political uncertainty. This is why McKinsey predicts that the retail segment of alternatives will be a primary driver for alternative growth. By focusing on a broad range of commodities, financial products, and mutual funds, retail alternatives offer an even more precise focus on specific investment outcomes. The increased innovations in the product and packaging of these alternatives continue to democratize access for the mass affluent.
With easy access to tailored alternative investments that capture specific returns and behaviors, there is no excuse for vulnerability in your portfolio. Begin your alternative strategy by investing in one of Arthena’s art funds that store your wealth in an inflation and recession resistant market with proven positive returns. Accredited users can access our art investment funds online and become investors within minutes.