Adding alternatives may help optimize risk/return 

In a portfolio, investors typically try to maximize return and minimize risk. Adding a sleeve of alternative investments to a public market portfolio can improve upon a range of stock/bond allocations by seeking to both enhance returns and minimize volatility. Exact sizing and investment selections in an allocation to alternatives may vary based on an investor’s objectives, risk tolerance and outcomes they are seeking to achieve, but typically an investor should consider dedicating a meaningful enough allocation to achieve the desired risk/return benefits.

Investors are seeking alpha, income and diversification

Macro environments shift, but investors consistently seek alpha, income and diversification — outcomes that alternatives may provide, depending on which asset class is selected. For instance, private equity may enhance returns, but may not prioritize income or diversification. Real assets, like real estate and infrastructure, on the other hand, exhibit low or negative correlation to a 60/40 portfolio and often provide stable income and inflation protection.

Manager selection is critical

The difference between the performance of top and bottom managers compounds over time and may make a sizable impact to long-term investment returns. This is particularly acute in private markets, where return dispersion can be significant. There are a wide range of investing styles and approaches in alternatives and manager skill is paramount.

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