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Young, wealthy investors are turning to alternative investments

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More advisors are using alternative investments

Alternative investments typically fall into 4 categories: hedge funds, private equity, “real assets” similar to real estate or commodities and prepackaged investments generally known as “structured products.”

Amid double-digit losses within the stock and bond markets this yr, there’s been an uptick in advisors turning to alternative investments, as planners seek further diversification, in accordance with a recent survey from Cerulli Associates. 

The highest reasons for alternative allocations were to “reduce exposure to public markets,” “volatility dampening” and “downside risk protection,” the Cerulli survey respondents said.   

Scott Bishop, a licensed financial planner and executive director of wealth solutions at Houston-based Avidian Wealth Solutions, said some clients use a portion of their portfolios to teach their adult children about investing. And these younger investors are increasingly eyeing alternative assets.

“I believe everybody’s very fearful concerning the stock market, and in the event that they’re of their 40s, they’ve probably been burned a few times,” he said.

‘Know what you own and why you own it’

With more interest in alternative investments, experts say it is vital to grasp the risks — in addition to the products themselves — before shifting portfolio allocations.  

“Before everything, know what you own and why you own it,” said Ashton Lawrence, a CFP and partner at Goldfinch Wealth Management in Greenville, South Carolina.

There is a growing range of products falling under the umbrella of other investments, and it is important to grasp how an asset could perform through different market conditions, he said. 

Before everything, know what you own and why you own it.

Ashton Lawrence

partner at Goldfinch Wealth Management

“It’s not likely fair to check a sports automotive to a minivan and query why the minivan is not maintaining,” Lawrence said. After all, alternative investments stands out as the minivan or the sports automotive in that analogy, depending on the economic climate.

For client allocations, Lawrence uses stock alternatives to spice up returns while reducing risk, and on the bond side, alternatives may provide a “stabilizer” for the portfolio.  

“I haven’t got to outperform on the upside,” he said. “But when that market pulls back, I don’t desire to incur the total breadth of that pullback.” 

For top-net-worth investors, alternative allocations may vary by portfolio size, goals and risk tolerance. Nonetheless, a bigger allocation could also be riskier for do-it-yourself investors without skilled guidance.

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