Alternative Investments: Tool, Not Trophy
Alternative investments are often discussed as a way to diversify beyond traditional portfolios. Their role depends on how and why they are used, as well as an investor’s individual objectives, risk tolerance, time horizon, and liquidity needs.
When implemented appropriately, alternative investments may complement public markets by providing differentiated exposure, income characteristics, or risk profiles. Common categories that may be considered by accredited investors include:
Private Equity
Investments in private companies through strategies such as buyouts, growth equity, secondaries, and co investments. These approaches typically involve long holding periods and rely on company specific execution rather than public market pricing. Performance for these strategies is often referenced using internal rate of return, or IRR, which reflects the timing of cash flows and capital calls rather than periodic market pricing.
Private Credit
Direct lending strategies, often senior secured, that provide exposure to nonpublic debt instruments. These investments may differ from traditional fixed income in terms of structure, liquidity, and risk characteristics.
Structured Notes
Customized debt securities with embedded derivatives that reference underlying assets or indices. Payoff structures can vary widely and may include features such as enhanced income potential or limited downside exposure, subject to issuer credit risk.
Long/Short Equity SMAs
Separately managed accounts that take both long and short positions in securities. These strategies seek to manage exposure across market environments and are dependent on manager selection and execution.
Performance in public market strategies is commonly evaluated using timeweighted returns, which measure how an investment performs over a period independent of cash flow timing.
It is important to note that IRR and timeweighted returns measure performance differently and are not directly comparable. Each metric serves a distinct purpose based on the structure and liquidity of the underlying investment.
Alternative investments involve unique risks, including illiquidity, higher fees, valuation complexity, and manager specific considerations. They are not suitable for all investors and should be evaluated within the context of a complete financial plan.
If you would like to discuss alternatives at a high level and how they may fit within your overall financial picture, feel free to reach out.