Goals of Alternative Investments

Portfolio Diversification

Understanding how different asset and investment classes relate to one another is critical when building a diversified portfolio. A portfolio of investments that all move in the same direction, at the same time, has the potential to increase the portfolio’s overall risk.

Because of their historically low correlation to traditional asset classes, alternative investments have the potential to reduce portfolio volatility.

The bear markets of 2000–2002 and 2008 have reminded yet another generation of investors of the importance of diversification.

Looking to the institutional investing space — particularly university endowments — one can see how their approach to diversification has shifted over the last 10 years. According to an annual study conducted to monitor investment allocations of several hundred university endowments, from 2005 to 2014, the average endowment reduced their exposure to stocks from 59% to 36% and increased their allocations to alternative investments from 17% to 51%.

 

Endowments Have Sharply Increased The Use of Alternatives Over the last 10 Years

 Average University Endowment

Source: NACUBO Annual Endowment Study 2005, 2014

 

Further analyzing how these endowments allocate their portfolios, we see a significant difference versus a more traditional "moderate" portfolio of 60% stocks and 40% bonds. Endowments have as much as 53% of their portfolio committed to alternative investing strategies.

 

Seeking True Diversification

True Diversification | Alternatives

1. Source: NACUBO 2014 Common Fund Study of Endowments

 

Learn about the Peak-to-Valley declines of alternative investments

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Endowments Sharply Increased Use of Alternatives