Investors interested in alternative investments should be sure to understand how such products work and their unique risks, according to the Financial Industry Regulatory Authority (FINRA), which has issued an investor alert on the issue.
Traditional investments are stocks, bonds and cash, and sometimes real estate. Non-traditional (or alternative) investments are everything else. If that sounds like a loose definition, it is: Alternatives can include precious metals such as gold, hard assets such as commodities, and a number of financial products, such as private equity funds and hedge funds. They often employ complex strategies, including short selling, leveraging, and hedging, through the use of derivatives, which are complex financial instruments.
Alternative mutual funds may be a compelling choice if you’re seeking to manage volatility, but if you’re expecting them to outperform the market, you may want to reconsider. Alternatives are not hedge funds, which are widely considered (inaccurately, at times) to be outperforming investments. Many alternative funds are relatively new, so the jury is still out on their performance. And alternatives can come with high fees. According to FINRA, the average annual operating expense of an alternative fund is 1.5 percent.
A word to the wise, then: Consider alternative mutual funds if they’re right for you and your individual financial circumstances and goals, but before investing, be sure you understand not only how the fund you’re considering works, but also how it might fit into your overall portfolio. Your financial advisor can help you do this.