By definition, an investor interested in alternative asset
classes is an investor who thinks about risk. This is not to
say that these investors neglect the return side of the
equation. Far from it. The goal of all investors is to maximise
the return generated by a portfolio for a given level of risk,
over a particular time horizon.
In investment terms, this is called portfolio optimisation and
is achieved by actively managing the risk and reward
characteristics of the investments made. As we have seen in
earlier topics, an optimal portfolio will be well diversified,
combining asset classes that are uncorrelated to each other.
Alternative investments fit well into this diversification
process.
- Firstly, they represent an asset class of funds and
products with greatly differing risk/return
profiles.
- Secondly, they have little correlation to each other or to
the financial markets.
In other words, alternative strategies provide a wide palette
for investors who want to manage the levels of risk and return
within their portfolios actively.
Whether an investor opts to put all of their capital into
alternative investments, or only a part of it, they will need
some basic tools for judging one fund or product against
another.
Risk-adjusted return statistics are the most common
metrics used to compare one alternative investment product with
another. The most widely used risk-adjusted return statistic is
the Sharpe ratio.
