Diversification is a well-known strategy used to improve returns and lower risk. Alternative investments manifest different characteristics and returns compared to traditional investments. Illiquidity in the underlying investments is common. A low correlation of returns with traditional investments offers opportunities for hedging and arbitrage (buying and selling at two different prices at the same time). Most investors look to add value to their portfolio with alternative investments. To achieve this end, they chase better returns or lower their risk through diversification and hedging.
On the flip side, the alternative market is characterised by low levels of regulation and less transparency. Historical data can be difficult to acquire. Besides, each alternative investment offers a unique set of legal and tax considerations.
What is the benefit of alternative investments for a portfolio manager?
- Low correlation to public market performance
- Opportunities to hedge against inflation
- All of the above
The correct answer is C.
Option A is correct. Low correlation is a great feature in terms of hedging.
Option B is correct. Real estate and commodities offer good inflation protection.
This makes options C the best answer.
Reading 50 LOS 50c:
describe potential benefits of alternative investments in the context of portfolio management
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