Alternative Investments

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Alternative Investments are generally those investments that are not publicly traded stock, bonds, or cash.

These kinds of investments are often used to provide greater portfolio diversification, a low correlation to a publicly traded portfolios, create the potential for distributions for income, and potential for growth.

While, as with all investments, past performance is not a guarantee of future results, the selective addition of alternative investments that have historically demonstrated lower correlation to traditional market indices may:

  • Help to reduce overall portfolio volatility through diversification
  • Potentially increase long-term portfolio performance through a variety of market conditions [1]
  • Business Development Corporations
  • Royalty Interests
  • Non-Publicly Traded Real Estate Investment Trusts
  • Equipment Leasing
  • Oil& Gas Investments
  • Land Banking
  • Private Placements
  • Hedge Funds
  • Managed Future Private Equity and venture capital
  • Precious Metals

Case Study:
Leading U.S. Endowments

According to a 1998 report by the National Association of College and University Business Officers (NACUBO), the 31 university endowments in the U.S. managing more than $1 billion allocated an average of 24.5% of their portfolios to alternative asset classes at that time. By 2011, that percentage had steadily grown to 60% for the 73 endowments managing more than $1 billion.

Endowments have used a variety of alternative investment strategies focused on the potential benefits of better managing portfolio risk and enhancing long-term returns. It must be noted that endowments generally enjoy longer time horizons than do most individual investors, allowing for a greater consideration of less-liquid investment strategies. Individual investors are not afforded such Flexibility, and accordingly would not typically consider such a high concentration in alternative investments.

[1] – There is no assurance that these objectives will be achieved. Diversification does not guarantee a profit or protect against loss.

[2] – Information derived from the 2011 NACUBO-Commonfund Study of Endowments® (“NCSE”) is based on the fiscal year ending June 30, 2011. NCSE categorizes alternative investments into the following categories: private equity (LBOs, mezzanine, M&A funds and international private equity); marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, and event-driven and derivatives); venture capital; private equity real estate (non-campus); energy and natural resources (oil, gas, timber, commodities and managed futures); and distressed debt. In the above chart, marketable alternative strategies and distressed debt are combined and reflected as “Hedge Funds,” venture capital and private equity are combined and reflected as “Private Equity,” and “Real Estate” consists of private equity real estate. Past performance is not indicative of future results. Performance is not inclusive of fees, which would reduce an investor’s return.

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