Considerations when implementing alternative investments in multi-asset class portfolios
Fidelity has developed a framework for allocating to alternative investments based on proprietary research that outlines suggested portfolio mixes across the liquidity spectrum.
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Institutions and advisors allocate to liquid and illiquid alternative investments for a variety of potential benefits including enhancing a portfolio's returns, managing risk, or improving diversification.
As product and strategy innovation opens the door to broader usage of alternative investments in multi-asset class portfolios, investors of all types are increasingly seeking guidance on suggested allocation levels.
Fidelity has explored return, volatility, liquidity, and other variables for traditional and alternative asset classes to help develop a potential implementation framework for four investor personas with varied financial considerations and needs.
The framework suggests allocation ranges based on liquidity needs and the risk/return benefits of investing in alternatives: it includes illiquid allocations of up to 10% for a retiree, up to 15% for a high-net-worth individual, or up to 30% for an endowment; and liquid allocations of up to 20% for an investor with high liquidity needs.
Institutions and advisors can consider these potential ranges in portfolio construction decision-making for themselves or their clients, while this framework also addresses potential nuances, challenges, and opportunities in implementing alternatives.
Alternative investments are investment products other than the traditional investments of stocks, bond, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, re al estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.
Information provided in, and presentation of, this document are for informational and educational purposes only and are not a recommendation to take any particular action, or any action at all, nor an offer or solicitation to buy or sell any securities or services presented. It is not investment advice. Fidelity does not provide legal or tax advice.
Before making any investment decisions, you should consult with your own professional advisers and take into account all of the particular facts and circumstances of your individual situation. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in these materials because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services.
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