Alternative Investments for the Rest of Us

These portfolio diversifiers aren’t just for the wealthy.

Adam Shell

IT’S NOT ONLY MUSIC LOVERS who venture beyond the mainstream to tune in to alternative offerings. Main Street investors in search of diversifiers, shock absorbers and risk reducers for their portfolios should also consider owning a small sliver of alternative investments, or ones that differ from plain-vanilla asset classes such as stocks, bonds and cash.

Access to “alt” investments, such as hedge funds, private equity, venture capital and the like, is still restricted mainly to “accredited” investors, or wealthy investors who meet Securities and Exchange Commission requirements, such as having a net worth of more than $1 million (not including a primary residence) or annual income of more than $200,000 (or $300,000 including a spouse). Alternative offerings available to accredited investors face less regulatory scrutiny (which means they have fewer investor protections). They also tend to include private companies and asset classes that don’t trade on public exchanges and employ more sophisticated strategies. For instance, private equity refers to investments in companies that aren’t publicly traded. Hedge funds can use borrowed money to amplify returns, and they can sell stocks short, betting on a price decline, which gives them the ability to make money in down markets. Alternative investments are less liquid, which means they’re harder to buy and sell quickly. And they typically require a longer holding period to realize profits.

But you don’t have to be an accredited investor to invest like one. Mom-and-pop investors can gain exposure to investments that mimic the strategies and performance of alt investments via exchange-traded funds and mutual funds. “The industry is becoming more democratized,” says Tom Kehoe, managing director and global head of research and communications at the Alternative Investment Management Association.