Alternative Investments? There Is No Such Thing!

Alternative investments are hot these days… But what are they, exactly? Broadly speaking, “alternative investments” could mean pretty much anything beyond “traditional” investments in stocks, bonds, or cash. These could be futures, options, commodities, currency carry trades, and a multitude of other specific strategies that yield risk-and-return profiles that don’t fall neatly into the framework of the capital asset pricing model (CAPM), and cannot be fully described through their correlations with the S&P 500. I guess, that’s why they are labeled “alternative” investments.

In my mind, the word “alternative” is not that far from “marginal”, and in real life it seems like many people tend to marginalize these investment options. I don’t know why… Perhaps, it is fear of the unknown, as many “alternative” investment strategies may not be easy to comprehend within the modern seven-minute attention span…

My point is that the word “new” instead of the word “alternative” would be a more appropriate description of these investment strategies. Describing them as “alternative” is merely a matter of perception. I wonder if John Bogle’s idea of passively investing in the S&P 500 index was considered an “alternative” investment back in 1975? Or maybe the term “alternative investments” wasn’t coined yet? Of course, nowadays, the strategy of passively tracking the S&P 500 is considered as vanilla as they come! Even back in the 15th century, the lands discovered by Columbus were nicknamed the “New World”, and not the “Alternative World”. Yes, many things in the Americas were weird, unknown, and even frightening to Europeans, yet they realized that the newly discovered land was fundamentally not much different from Europe. The same concept applies to “alternative” investments now – fundamentally, there is nothing “alternative” about them! These are just strategies that few people were aware of until recently, i.e. they are “new” to the general public.

Why, then, are “alternative” investments so popular now? Perhaps, it is because traditional investment options, like stocks and bonds, have not been doing so great lately… Or, perhaps it’s due to a growing realization that, in today’s interconnected world, the best investment strategy should be just as complex as the world around us, composed of a multitude of “alternative” investment options and tailored to each client’s particular needs and objectives.

From this perspective, an “alternative” investment advisor is akin a good doctor who remains current on medical research long after his days in med school. He does the tests, and then uses his knowledge of the advances in the field for the best treatment. And a doctor with a true gift knows what’s wrong with you without any tests – just feeling your pulse and looking you in the eye is enough for him!

Similarly, a great investment advisor deeply knows the true needs of her clients, and individually tailors investment strategies with the full use of all investment options, “traditional” or “alternative”. Now, that’s an “alternative” approach! Or maybe we should call it the right approach?..