Alternative investments provide diversification benefits from "summary" of Institutional Investment Management by Frank J. Fabozzi
Alternative investments, such as private equity, hedge funds, real estate, commodities, and infrastructure, offer institutional investors the opportunity to diversify their portfolios beyond traditional asset classes like stocks and bonds. By including alternative investments in their portfolios, institutional investors can potentially enhance returns and reduce overall portfolio risk through diversification. One of the main reasons why alternative investments provide diversification benefits is that they have low correlations with traditional asset classes. This means that the returns of alternative investments do not move in the same direction as the returns of stocks and bonds. As a result, when one asset class is performing poorly, another asset class may be performing well, helping to offset losses and stabilize the overall portfolio. Furthermore, alternative investments often have unique risk and return characteristics that are different from traditional asset classes. For example, private equity investments may offer the potential for higher returns than public equity investments, but they also come with higher risks and longer investment horizons. By incorporating alternative investments with different risk and return profiles into their portfolios, institutional investors can achieve a more balanced and diversified investment strategy. In addition, alternative investments can provide exposure to different market sectors and investment opportunities that may not be available through traditional asset classes. For example, investing in real estate can provide institutional investors with inflation protection and income generation that may not be possible with stocks and bonds alone. By diversifying their portfolios with alternative investments, institutional investors can access a wider range of investment opportunities and potentially enhance their long-term investment performance.- Alternative investments offer institutional investors a way to diversify their portfolios beyond traditional asset classes, reduce overall portfolio risk, and potentially enhance returns. By including alternative investments with low correlations, unique risk and return characteristics, and exposure to different market sectors, institutional investors can build a more resilient and balanced investment strategy that may better withstand market fluctuations and economic uncertainties.
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