Opportunities for Retail Investors in Alternative Investments : An investigation of whether liquid alternatives can increase diversification and enhance returns in retail investors' portfolios

Abstract

Today's low-interest environment implies that expected stock and bond returns will be lower than average over the next decade. When traditional assets are unable to meet investors' needs, alternative assets have received increasing attention. Previous research has concentrated on alternative investments from the perspective of institutional investors. We take a retail investor's perspective and examine their opportunities in the universe of alternative investments. Contrary to the belief that alternative assets are always illiquid, a growing number of so called ‘liquid alternatives’ have been listed on public stock exchanges. Business Development Companies, Listed Private Equity, Real Estate Investment Trust, High Yield bonds, and Commodities have demonstrated in this paper that they are capable of meeting new demand that stocks and bonds cannot. This study demonstrates that while listed alternatives have a higher risk, especially during market turbulence, they can still help increase portfolio diversification and risk adjusted return. Our results suggest that regardless of the investor's objective, including alternatives enhances retail investors' portfolios and beats those that merely include traditional assets.