Alternative assets are all investable asset types or classes other than publicly listed equity shares, bonds (fixed-interest investments), and cash deposits.
Example of alternative assets:
- Precious metals
- Cryptocurrencies
- Commercial property
- Carbon credits
- Fine art and other collectibles
- Private equity shareholding
- Tokenized assets - which can include all of the above
What is asset allocation?
The proportion of a portfolio given to different types of assets is its asset allocation. The traditional asset allocation is 60% in shares and 40% in bonds and fixed interest. That is known as the ‘60/40’ investment strategy.
Adding alternative assets to a 60/40 portfolio requires adapting the allocation by reducing the percentage assigned to shares and bonds. The asset allocation you choose must balance your desire for wealth protection with your appetite for growth and risk.
Why should you own alternative assets?
Alternative assets can be a valuable addition to any investment portfolio for two principal reasons:
1. Diversification
Diversification means spreading your total risk by having a portion of your total investments in non-correlated assets. It’s the concept of not having all your eggs in one basket. Non-correlated assets are assets whose value responds differently to the economic forces that affect the value of the share market.
Gold is a good example of a non-correlated asset
The market price of gold, measured in Troy ounces (one Troy ounce = 31.1035 grams), tends to rise when conditions of economic uncertainty depress the share markets.
Investing in a range of different shares on the stock exchange is not a true diversification strategy, because even though they might represent equity in different companies, they are still in the same market. Diversification requires exposing a portfolio to several different markets.
2. Growth potential
Alternative assets can also give an investor exposure to higher rates of return. Higher returns usually come with an elevated level of risk. Cryptocurrencies offer the potential for very high growth, combined with a high level of price volatility. However, some investors are willing to accept that risk in return for the chance to make high returns.