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Market Update

Why Alternatives Don't Always Help Diversify

Investors seek out alternative funds for a variety of reasons, but the diversification benefits might be smaller than you'd expect.

Alternative investments are supposed to excel at diversification. As the name suggests, they're envisioned as fundamentally different from mainstream asset classes, such as large-cap stocks. But in our recent examination of asset-class correlations, the "2021 Diversification Landscape," we found that alternative strategies have a mixed record in terms of diversification value.

Alternative investment strategies attempt to expand, diversify, or eliminate the dominant risk factors contained in traditional market indexes, such as equity, credit, and interest rates. These strategies tend to focus on capital preservation, long-term portfolio diversification, or enhanced risk-adjusted returns in isolation or combination. Some alternative funds invest in a single asset class, while others invest across multiple asset classes using a variety of investment techniques.