10 Myths Surrounding Alternative Investments
July 31, 2013 | Topics: Alternatives
Despite the many attractive aspects of alternative investments, they are often not well understood. Some investors still think of them as high-risk, exotic funds reserved for ultra-high-net-worth individuals and sophisticated institutions, however the reality is that alternatives have become mainstream. Here, we address some of the common myths associated with alternative investing and discuss how alternatives can be an integral part of nearly every investor's portfolio.
- 1. Myth: Alternative investments are their own unique asset class.
- Reality: Alternatives represent different approaches to investing across a variety of markets and asset classes.
- 2. Myth: Only institutional investors and ultra-high-net-worth individuals can access alternative investments.
- Reality: Individual investors have greater access to alternatives than ever before due to recent innovations in product structures.
- 3. Myth: Alternative investments are more volatile than stocks and bonds.
- Reality: When used as portfolio diversifiers, alternatives have the potential to reduce the overall volatility.
- 4. Myth: Alternatives invest in derivatives, which in turn, increase their risk.
- Reality: Derivatives are commonly used investment tools designed to manage or hedge out risks.
- 5. Myth: Investors do not have access to their capital if they invest in alternatives.
- Reality: Liquidity levels vary among alternatives and are specific to each investment type.
- 6. Myth: Alternatives will always outperform stocks.
- Reality: Just like traditional assets, alternatives are subject to inherent risks and will outperform (or underperform) at different periods in time.
- 7. Myth: It is easy to pick the right alternative - all I need to do is look at historical performance.
- Reality: Investors need to consider a wide array of factors beyond performance when selecting which alternatives are best suited for them.
- 8. Myth: Investing in one type of hedge fund or private equity fund will diversify my portfolio.
- Reality: Investing in only one type of alternative strategy may provide some diversification benefits, but can also concentrate risk exposures.
- 9. Myth: Alternatives failed to protect investors during the financial crisis.
- Reality: In general, investors with exposure to alternatives fared better during the financial crisis than those with traditional portfolios.
- 10. Myth: Alternatives are too expensive.
- Reality: Although fees for alternatives are typically higher than they are for traditional investments, the fees pay for broader access to investments and are intended to align manager and investor interests.
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Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors.
Investing in alternative strategies such as a long/short strategy, presents the opportunity for losses which exceed the principal amount invested. There is also the possibility that long and short strategies could both fail, thereby increasing volatility and potential losses.
Hedge funds may not be suitable for all investors and often engage in speculative investment practices which increase investment risk; are highly illiquid; are not required to provide periodic prices or valuation; may not be subject to the same regulatory requirements as mutual funds; and often employ complex tax structures.
Utilizing private equity involves significant risks along with the opportunity for substantial losses.
Investors should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds' prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.
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