Portfolio diversification: the role of alternative investments

Strategies to diversify an investment portfolio are a vital aspect of managing risk to suit your profile as an investor.If, for example, you are approaching the time when you wish to draw income from your investments, you may be inclined to take a more defensive position than if you’re nearer the start of a long-term investment horizon or specifically searching for growth.

Diversification strategies

Put most simply, the goal of diversification is to build a portfolio of investments with low correlation to each other in order spread risk. Lowering the correlation between different assets in a portfolio protects against broad market swings and reduces downside risk. Traditionally, one of the most common diversification has been to invest in both bonds and equities. These asset classes typically have low correlation to each other and the weighting of each can be adjusted within a portfolio according to market conditions. Other common approaches include spreading investments across sectors and geographies.

For much of the 1990s, a 60/40 allocation between equities and bonds was a largely successful strategy, generating solid returns with relatively low volatility. Since then, however, correlations have risen across a number of asset classes and the same allocation is no longer as effective at diversifying away from broader market movements.

Similarly, investors seeking to diversify through investment in different geographies should be wary of investing in similar economies – e.g. in Latin America or Africa – which are often affected by similar geopolitical and macroeconomic issues, negating any perceived diversification.

Alternative investments as a means of diversification

Alternative investments – broadly speaking, investments that aren’t listed and traded on a stock exchange – are fast becoming an attractive option for private investors seeking to offset short term market volatility. In an investment climate characterised by high stock market volatility, low bond yields and low interest rates, alternatives (which are generally higher risk than conventional investments) offer the prospect of higher returns while being relatively uncorrelated with both shares and bonds.

Moreover, alternative assets are no longer the sole preserve of institutional investors and the super-rich. As technology evolves and private investors become increasingly comfortable with investing online, opportunities for ordinary investors to gain exposure to categories such as Enterprise Investment Scheme (EIS) qualifying businesses, commodities and infrastructure have become more widespread.

Investing with the Experts 

While the advantages of investing in alternatives are clear, few private investors have either the time or the expertise to adequately manage their risk. For investors looking to invest in smaller companies the necessary research and analysis, due diligence and valuation can be extremely time-consuming and frustrating.

At CoInvestor, we have built a digital platform that allows sophisticated private investors to co-invest alongside experienced fund managers on a deal-by-deal basis or invest into their own funds.

Each investment opportunity listed on the platform has been subjected to detailed investment processes by the fund manager presenting it. Once the fund manager, acting as lead investor, commits to proceed and lists their deals, they invite qualifying participants to invest alongside them as co-investors.

By bringing investors, fund managers and advisers together on the same platform, CoInvestor is simplifying a complex process and giving private investors access to alternative assets that would previously have been solely the domain of institutional investors.