The most essential element to successful long-term investing is effective asset allocation. We believe that active asset allocation stressing maximum diversification across as many asset classes as possible is the best way to grow and protect wealth over the long term.
An important asset allocation and portfolio construction concept is called correlation. A simple definition of correlation is the statistical measure of the degree to which the expected investment returns of different assets will move in the same or opposite direction with investment market changes. The most risk-efficient investment portfolio will include a large number of disparate asset classes that have lower expected correlation to each other over time. Correlation among asset classes change over time, however, requiring asset allocation strategies be periodically reviewed and even modified at times.
Adding alternative investments to a core investment portfolio can be a great way to create better portfolio diversification and lower investment risk over the long run. The alternate investment category in general offers lower correlation to core investment assets – stocks, bonds and cash. In other words, the investment returns on alternative investments often zig when core investments zag. This divergence can create additional risk-adjusted return (called “alpha”) to the portfolio while reducing the overall risk of your investments – both a good thing.
Common examples of alternative investment classes include hedge funds, private equity funds, real estate, oil and gas development, equipment leasing, managed futures, private loan funds, among others. The investment objective of adding alternative investments to a core portfolio is to lower investment risk over time, not to speculate for windfall gains.
