Why Alternative Investments Should Be In Every Portfolio

[Michael Episcope]

“Alternative investments,” such as private equity real estate, are finding favor among high-net-worth investors these days.

They offer opportunities for accredited investors to invest outside the world of stocks, bonds and mutual funds. And real estate investment funds offer investors new ways to diversify and participate in real estate without managing the day to day activities.

Institutional investors are still the main backers of alternative investments in private real estate. They’re following the example of Yale University, which has grown its endowment from $4 billion to $25.6 billion in 20 years. Managers of higher-education endowments now allocate a majority of their assets to alternative investments, according to the National Association of College and University Business Officers.

Many wealth managers advocate real estate as part of a larger portfolio strategy due to the high expected returns, low volatility, and lack of correlation to stocks and bonds. Returns are higher compared to other alternatives with the same expected risk. Rents and property values tend to keep pace with inflation. When sold, real estate is also generally taxed at lower capital-gains rates.

What sometimes keeps individuals from buying real estate to diversify their portfolios is the cost of entry: The minimums to get into a quality fund are sometimes too high for investors — usually $250,000 to $500,000 per fund. But some firms offer deals with lower minimums than that.

A mix of stocks, bonds and private real estate investment shows a higher risk-adjusted return and lower volatility than other portfolios. And that’s a benefit in today’s world, where the ups and downs of the stock market make daily news.

PLUS: For more information on alternative investments, which include venture capital, private equity, hedge funds, real estate investment trusts, commodities, precious metals, wine, art and coins, read this article.

http://www.thestreet.com/story/13155301/1/7-common-alternative-investments-that-all-investors-should-know.html