How do you define alternatives?

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With increased buzz around alternatives, we asked advisors to share their perspectives.

Against the backdrop of a breakdown in the decades-long negative correlations between stocks and bonds, the spotlight on alternative investments has grown brighter. But what are they exactly? We reached out to advisors to get their perspectives on what constitutes an alternative investment and how these investments fit into investor portfolios. Here's what we found:1

What is considered an alternative investment?
Generally, "alternative investment" is a catchall for any investment beyond the traditional realm of long-only, publicly traded stocks, bonds or cash. That’s a wide net. Given that broad definition, we asked advisors what they consider to be alternative investments. Our survey suggests that alternatives are usually associated with asset class exposure that is beyond stocks or bonds (e.g., real estate, private equity) and access to non-publicly traded markets (e.g., private real estate, private debt).


Table showing the top ten investments advisors consider alternatives led by private real estate funds (75%), private equity funds (74%), and venture capital funds (68%)
Source: Columbia Threadneedle Investments.


Notably, advisors also identified collateralized loan obligations (34%) as alternatives. This suggests a broad understanding of what constitutes an alternative investment and reiterates advisors’ focus on asset class exposure as part of that definition.


The “why” behind alternative investments
Our survey indicates that advisors turn to alternatives to smooth out the investment journey. Advisors identified diversification (77%) and lower portfolio volatility (50%) as the primary reasons they turn to alternatives. Other reasons advisors cited included higher return (33%) and income (33%).


Chart showing that the main reasons advisors use alternatives are for diversification (77%) and for lower portfolio volatility (50%)
Source: Columbia Threadneedle Investments.


The challenges to investing in alternatives are still significant
While alternative investments could provide investors with attractive opportunities, they come with unique obstacles. These relate to their complexity, often tied to accessing private markets, which could mean lower liquidity and transparency compared with their public counterparts. Moreover, they could also involve higher fees and investment minimums. Regulatory disparities further complicate matters, as some alternatives fall outside the scope of traditional investment policies and may face constraints from home offices. Advisors voiced common concerns over limited liquidity (59%), high fees (50%) and clients’ lack of familiarity (43%) as significant barriers to adopting alternatives.


Chart showing that the main challenges advisors face in allocating to alternatives are limited liquidity (59%) and high fees (50%).
Source: Columbia Threadneedle Investments.


Because the universe of alternatives has expanded quite significantly over the past few years, and given the constraints of liquidity and high fees, investors could consider more accessible alternative asset classes such as floating rate or commodity funds, which could offer access to uncorrelated returns but have the benefit of a traditional mutual fund or exchange-traded fund wrapper that offers more oversight and liquidity.


The bottom line
Alternatives encompass a wide variety of approaches to investing, and while they may provide the benefits of diversification and higher returns, there are still significant risks and limitations that could make investing in alternatives challenging. A financial advisor can help investors navigate the complexities and identify the most appropriate options to meet your financial goals.


1 An online survey conducted through The Financial Collective 2.0 and Connecting Advisors in April 2024.


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