The world of alternative investing is extensive. In fact, the world’s largest 100 alternative asset managers saw assets under management increase by 10%, rising to $4 trillion in 2016—so alternatives can provide you with a wide array of investment options you may not even have considered.1
Alternative investments represent a set of diverse strategies and assets with risk-and-return characteristics that are distinct from those of conventional asset classes, such as publicly traded securities like stocks and bonds. Alternative assets may include investments such as private equity, commodities such as gold, infrastructure, real estate, artwork or even rare wines. Fortunately, investors have many alternative asset classes to choose from.
When different investments react the same way to market or economic events, they are considered to have a “high correlation,” and that can lead to higher volatility and added risk in your portfolio. Alternative investments often have a lower correlation to typical stocks and bonds (meaning they often react differently to market or economic events), leading to better portfolio diversification when combined with traditional investments.
Alternative strategies typically employ conventional asset classes in non-conventional ways. For example, equity long-short investing is an alternative strategy that takes long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decline in value.
Liquid and illiquid alts
Alternative investments can be offered to investors in two forms: liquid alternatives (or liquid alts) and illiquid alternatives (or illiquid alts). Liquidity describes the character of the structure in which the alternative assets or strategies are accessed. The greater the liquidity, the more readily an investment can be converted to cash.
A liquid alt is an alternative investment structure sold in the form of a mutual fund or an exchange-traded fund. Liquid alts can be sold on the open market relatively simply, are regulated more than illiquid alts and are more transparent in their governance. For example, MD has two liquid alt funds in its offerings: the MD Strategic Yield Fund (using global bonds and emerging market debt) and the MD Strategic Opportunities Fund (using commodity and currency exposures).
In contrast, illiquid alts are more difficult to realize into cash but provide numerous benefits as compensation for their lack of liquidity. While they do have high minimum initial investment levels and a lock-up period where investors can only sell out after a long waiting period, illiquid alts generally offer higher return potential as compensation for their lack of liquidity. MD offers illiquid private funds under the MD Platinum™ brand that can help complement the other holdings in your investment portfolio.
Regardless of whether you invest in liquid or illiquid alts, when you choose alternative investment strategies you effectively increase your portfolio diversification, enhance your return potential, “smooth out” portfolio performance over time and improve portfolio efficiency.