Alternative Investments and Non-correlated Assets

Investment managers use diversification to reduce risk in a portfolio.  There are several reasons for this.  First, diversification reduces the chance that a single position will have a major impact on a portfolio.  A one stock portfolio can have a serious impact on client wealth if the stock drops.  By owning hundred of stocks via mutual funds, the effect of a single poorly performing stock is greatly reduced.

Another method of diversification in a portfolio is to hold multiple “non-correlated assets.”  What non-correlated refers to is assets whose value can change independent of the core financial stock and bond markets. Traditional examples of non-correlated assets include alternative investments, real estate, precious metals and private equity.

Alternative investments include hedge funds, managed futures, currencies, absolute return strategies and tactical strategies.  Adding non-correlated assets to a portfolio can help to ease its overall volatility and smooth out its returns over the long term.

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