As an investor, you’ve likely heard of alternative investments – including hedge funds, private equity and high-yield bonds. If you wonder what role these assets can play in your portfolio, you’re not alone.
With their unique characteristics and important diversification benefits, they can play an important role in helping investors weather and manage market volatility through different market cycles. Alternative investments represent an extensive set of diverse strategies and assets with different risk-and-return characteristics than conventional asset classes like stocks and bonds.
Alternative investments can help smooth out volatility
It is very difficult to predict which asset classes (what types of stocks and bonds, and from which countries) will be the best performers over a given period.
Effective diversification helps to “smooth out” portfolio returns over time, so an investor can enjoy peace of mind knowing that their portfolio is created to help minimize volatility (i.e., extreme ups and downs in the market). Alternative investments are a natural way to diversify as they unlock a huge market with a low correlation with traditional asset classes.
Alternative investments can help through different market cycles
A well-diversified portfolio normally has a variety of different assets. While traditional asset classes can be an effective source of diversification, this can be further enhanced with exposure to alternative investments. The chart below compares the performance of different alternative asset classes over time. As you can see, winning alternative investments rotate from year to year, which is why they can effectively complement traditional asset classes (stocks and bonds) and act as a powerful diversifier through different market cycles.
Winners rotate: Different alternative investments outperform at different times
Annual returns of key indices, including alternative asset classes, 2007 to 2013 (in Canadian dollars)
The performance of alternative asset classes can vary greatly from one year to the next, so it is beneficial to have exposure to a number of alternative investments.
In this chart, “global” is used to mean all countries, while “international” is used to mean all countries excluding the U.S. and Canada.
Access alternative investments for everyday investors
Diversifying among different types of assets—including different types of alternative investments—can help you lower portfolio risk and ensure you always have some exposure to the strongest-performing asset classes.
However, alternatives are complex instruments that come with opportunities and risks. Your MD Advisor can help assess your situation and recommend accessible solutions that can provide the benefits of investing in different types of alternatives via standalone mutual funds, exchange-traded funds (ETFs), fund-of-fund (“wrap”) products and investment pools (for higher-net-worth investors).
To suit your personal investment needs, MD allows you to access a range of liquid and longer-term alternative investments, including MD Strategic Yield Fund (global bonds and emerging market debt) MD Strategic Opportunities Fund (commodity and currency exposures) and the new MD Platinum™ Global Private Equity Pool.
Learn more about MD's investments offering or contact your MD Advisor to find out how we can help.