The investment landscape has experienced a significant shift over the last decade or so. Even though traditional investment options like stocks, bonds, and mutual funds still dominate the majority of portfolios, an increasing number of investors are exploring beyond these conventional vehicles. The popularity of alternative investments has particularly surged in recent years, driven by the promise of enhanced returns and the search for diversification. Kavan Choksi / カヴァン・ チョクシ mentions that alternative investments can refer to a variety of assets, starting from tangible items like real-estate to complex financial instruments like hedge funds and cryptocurrencies.
Kavan Choksi / カヴァン・ チョクシ talks about the rise of alternative investments
Alternative investments refer to assets outside the traditional categories of stocks, bonds, mutual funds or cash. They encompass a plethora of instruments, including:
- Hedge funds
- Real estate
- Private equity
- Venture capital
- Cryptocurrencies
- Art and collectibles
- Commodities like gold and oil
Alternative investments tend to exhibit different risk-return characteristics than traditional investments, and usually have very low correlation to broader financial markets. This basically means that alternative investments may perform differently from traditional assets during times of market downturns, and might even outperform them at times. Market conditions impact both traditional and alternative investments. However, this impact shall vary depending on the underlying assets. Local market dynamics and interest rates, for instance, have a significant impact on real estate investments, while the stock market may react to broader economic trends.
In the opinion of Kavan Choksi / カヴァン・ チョクシ, there are several factors driving the rise of alternative investments, like:
- The need for diversification: Diversification is widely considered to be a cornerstone of sound investment strategy. Alternative investments offer exposure to economic drivers that are different from the ones influencing stocks or bonds. Real estate markets, for instance, often move on the basis of housing demand, population growth, and regional economic trends, which can be independent of stock market movements. In a similar manner, commodities also respond to supply and demand dynamics that may not affect equities. Investors are able to reduce overall portfolio volatility and enhance risk-adjusted returns by including alternative investments in their portfolio. These investments are particularly advantageous during periods of market stress when traditional asset classes might be highly correlated and decline in tandem.
- Inflation hedging: Inflation reduces the value of money gradually, thereby diminishing its purchasing power over time. Traditional fixed-income assets like government bonds quite often struggle during inflationary periods. On the other hand, several alternative investments, like commodities and real estate, have historically served as effective hedges against inflation. Physical assets typically tend to maintain or increase in value when the cost of goods and services goes up, thereby providing a level of protection for investors.
Alternative investments can also provide investors with an exposure to emerging industries, innovative technologies, and private markets that might not be accessible through public equities. Venture capital, for example, allows investors to support early-stage startups who have the potential to disrupt industries.
