Two Common Questions About Alternative Investing
For investors who decide to move forward and invest in alternatives, two common questions often arise: How much should I invest? How should I fund the investment?
With regard to the first question, there is no one correct answer. In my experience, investors typically allocate between 5 percent and 30 percent of their portfolio to alternatives, and this decision is generally driven by their risk tolerance and comfort in using alternatives. That said, I believe that if an investor decides to allocate to alternatives, they should allocate a sufficient amount so that it can have an impact on the portfolio. If the allocation is too small, the impact on the portfolio will be negligible, thus defeating the purpose of adding alternatives.
With regard to the second question, I believe the funding strategy should be based on the return and risk characteristics of the alternative being considered. If the alternative has predominantly equity-like return and risk characteristics (like global macro), consider funding the investment as you would an equity investment. Similarly, if the alternative has predominantly fixed income-like characteristics (like equity market neutral), consider funding the investment as you would a fixed income investment.
Walter Davis is an alternative investment strategist for Invesco.