Where do alternatives fit in traditional portfolios?

Alternative investments have become increasingly available to individual investors over the past several years, and these asset classes tend to weather volatility better than traditional investments, says David Wong, CIO, managing director & head, total investment solutions at CIBC Asset Management.

“It isn’t unusual to see these types of funds do better in volatile periods, given that they take on very little or no market exposure,” he said in a May 20 interview. “In 2022, when the S&P 500 was down 18%, the median manager in the relative value market-neutral equity hedge fund universe was up over 1%.”

And when markets are generally down — such as in early April following tariff announcements — the lack of regular valuation minimizes stress among private equity investors ” You [don’t] have had the same level of worry as public market investors,” he said.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Wong noted that institutional and high-net-worth investors have long leaned on “the Yale Model” — an investing strategy developed by David Swensen in the 1980s that leans on alternative assets to help diversify portfolios.

“What these investors have learned is that trading off liquidity of public exchange-traded securities and lower-risk investments, such as bonds, in exchange for lower liquidity has resulted in better returns over the past few decades,” he said.

And now more alternative funds are becoming available to individual investors, noted Wong. New “investor-friendly features” include the ability to buy at any time through a single transaction, lower minimum investment requirements, and frequent subscription and redemption periods.

Alternative investments can be broken down into two categories: liquid, such as hedge funds and commodities; and illiquid, such as private equity, private credit, private real estate and private infrastructure, Wong explained.

Investors with a longer time horizon and a diversified portfolio can especially benefit in this space, he said. For instance, a traditional 60:40 portfolio had a return of 8.8%, and volatility of 9.6% from 1990 to Q3 2024, according to JPMorgan. During that same period, if the investor had allocated 50% to equities, 30% to bonds and 20% to a combination of private equity, real estate and hedge funds, the portfolio would have achieved a return of 9.2%, with volatility of 8.9%.

“So a portfolio with a 20% allocation to diversified alternatives achieved better returns than a traditional portfolio,” he said. “But also importantly, it did so with lower risk.”

The key to realizing the benefits of investing in alternatives is patience, he said. Understanding the asset mix of the funds is equally important.

“Executing on the Yale Model for an individual investor demands a long-term focus, and individual investors need to have advice because on their own, they don’t have the governance structures that institutional investors have,” he said.

Further, keep liquidity in mind. “While liquidity features are increasingly present in alternative strategies that are available to wealth channel investors, it’s not meant to be used as a way to be extremely tactical with their portfolios,” he said.  

Stay tuned for next week’s podcast, where CIBC’s Meric Koksal will discuss asset allocations among different classes of alternatives.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.