Adding alternatives may help optimize risk/return 

Public asset classes are facing challenges from elevated valuations, low real yields and positive correlation. For those willing to venture outside a traditional stock-bond allocation, adding a sleeve of alternatives may help enhance returns and reduce volatility. However, different alternatives play different roles in portfolios. Investors should first identify their goal, then invest in the alternative asset class with the attributes to achieve it.

Investors are seeking alpha, income and diversification

In general, alternatives can enhance return potential, increase income or provide diversification, 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 performance difference between top and bottom managers compounds over time and can impact long-term returns sizably. Manager dispersion is particularly acute in private markets, which are newer and have a wide range of investing approaches. To unlock the return-enhancing potential of alternatives, investors must select an effective manager.

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