- Alternative investment strategies differ from traditional type of investments such as stocks, bonds, and cash.
- They may include investments such as real estate, commercial mortgages and private debt. Or they may use sophisticated investment strategies.
- Alternatives can provide investors with multiple benefits. They are typically used to dampen volatility, reduce correlation, improve cash flow or deliver higher returns.
- Alternatives may not be suited for all investors. Make sure you understand the underlying investments and the risks involved. Other things to consider include your time horizon and liquidity needs. Liquidity relates to how easily or quickly you can sell or exchange an investment for cash without a substantial loss in value.
Alternative investments strategies (‘alternatives’) are investments outside of the more traditional categories such as stocks, bonds and cash. For example, some alternatives invest in assets that offer lower liquidity, like infrastructure and real estate. Other alternatives invest in stocks and bonds but apply higher-risk investing strategies to generate returns.
As a result, alternatives may have certain drawbacks. These include:
- Restrictions. There may be higher investment minimums or other requirements that limit access to alternatives for some investors.
- Lower liquidity. Some alternatives do not trade daily, but rather weekly, monthly or quarterly. In some cases, your money may be locked into the investment for a set period of time.
- Higher risk. Many alternatives carry additional risks such as leverage (borrowing to invest). See the discussion of risk below.
- Higher complexity. Some alternative strategies employ complex trading strategies that require a higher level of due diligence and understanding.
- Higher cost. Given the unique nature of alternative strategies and special expertise required to manage them, they tend to be more expensive.
For these reasons, some alternatives may be difficult for the average investor to hold. They are generally more suited to institutional or sophisticated investors.
Shorting strategies
Aim to give investors the opportunity to profit from positions in investments expected to decline in price (known as a “short”). Can complement traditional (or “long”) investing.
Private Markets
Are not publicly traded. Can include commercial real estate, infrastructure, mortgages and illiquid credit.
Hedge Funds
Employ sophisticated strategies to produce positive returns in different market conditions. Offer low correlation to traditional investments.
Liquid alternatives
Improve access to alternatives due to lower minimum purchase requirements and daily pricing. Available as a mutual fund or exchange-traded fund (ETF).
- Enhance risk-adjusted returns. Alternatives generally strive to produce attractive returns that are not correlated with (or are largely independent from) traditional asset classes. As a result, they may perform well (or zig) when other investments in a portfolio struggle (or zag). When thoughtfully paired with stocks and bonds, these strategies can help improve the overall risk-adjusted returns of your portfolio.
- Create higher yield opportunities. Alternatives can include investments such as real estate and infrastructure (e.g. airports, ports, toll roads) that often pay attractive and stable income streams. These assets are not typically easy for the average investor to invest in but can provide another source of income, particularly when bond yields are low.
- Improve portfolio diversification and stability. Given their unique nature, alternatives can add new sources of returns, improving overall portfolio diversification. When properly implemented, use of alternative strategies can help dampen volatility and improve portfolio resiliency and stability, especially in tough markets.
Investors must carefully consider the level of risk involved in investing in alternative strategies. Before you invest, consider your willingness and ability to assume these risks. Here are some examples:
- Some alternative strategies use leverage to generate excess returns. Leverage involves investing with borrowed money, which can increase the risk and impact of losses.
- Strategies such as short-selling can also be used within alternative investments. Short selling is an investment or trading strategy that speculates on the decline in a stock or other security's price. However, this strategy comes with higher risks. Losses can be significant if the market takes a different direction.
- Some alternative strategies invest in businesses that are not publicly traded or not liquid. This can make it more difficult to exit the investment when you want to.
Before you consider adding alternatives to your portfolio, ask yourself these questions:
- What is the role of alternative investments in my portfolio?
- Do I understand this investment and how it works? Do I understand the risks?
- What is my time horizon? Do I need access to these assets in the next few years or are they part of a long-term investment plan?
- How comfortable am I owning strategies that might perform differently than traditional markets?
- How much transparency do I need from my investments? Am I comfortable with receiving valuations less often? Valuations on some alternatives may be less frequent than those on more traditional investments like stocks.
RBC GAM offers investors a range of alternative investments. As with any new investment, talk to your advisor about whether alternatives are suitable for you.
Disclosure
Last reviewed: January 1, 2023This has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes, as of the date noted only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Past performance is no guarantee of future results. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. You should consult with your advisor before taking any action based upon the information contained in this document.
Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.
This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription materials, which may be provided to qualified investors only. This document is for general information only and is not, nor does it purport to be, professional advice or a complete description of an investment in any fund managed by RBC Global Asset Management Inc. (RBC GAM). If there is an inconsistency between this document and the respective offering documents, the provisions of the respective offering documents shall prevail. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.
Investments in alternative funds are speculative and involve significant risk of loss of all or a substantial amount of your investment. Alternative funds may: (i) engage in leverage and other speculative investment practices that may increase the risk of investment loss; (ii) can be highly illiquid; (iii) are not required to provide periodic pricing or valuation information to investors; and (iv) are not subject to the same regulatory requirements as prospectus-offered mutual funds. In assessing the suitability of this investment, investors should carefully consider their personal circ*mstances including time horizon, liquidity needs, portfolio size, income, investment knowledge and attitude toward price fluctuations. Investors should consult their professional advisors and consultants regarding any tax, accounting, legal or financial considerations before making a decision as to whether the funds mentioned in this material are a suitable investment for them.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund’s offering documents before investing. The performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
