Alternative investments (commonly referred to as “alts”) provide investors an opportunity to diversify beyond traditional asset classes. Falling outside the bounds of typical public market assets like stocks and bonds, the broad category of alternatives encompasses many different individual asset classes (e.g., hedge funds, private equity, private debt, real assets, etc.) which vary widely in return objectives, liquidity constraints, volatility profiles, and other characteristics.

Having been utilized by large institutional investors for decades, alts are now becoming increasingly accessible for smaller organizations and individual investors. This newness, however, comes with myths and misconceptions around the nature of these asset classes. To help navigate this unfamiliar terrain, here are five truths about alternatives.

Alternative Investments Are No Longer Exclusive

One of the most common myths is that alternative investments are reserved exclusively for the ultra-wealthy or large institutional investors. While this has been true in the past because of limited access, the landscape is changing.

Today, a broader range of alternative investments are available to accredited – and even retail – investors due to evolution and innovation in the vehicles through which these investments can be accessed. Still, alternatives are not without certain trade-offs that need to be considered by any investor, liquidity constraints being chief of them, but the world of alts is no longer exclusive to only the largest investors.

Alternatives Offer More Than Just Higher Returns

Alternative asset classes have the potential to, and strive to, deliver outsized returns, but like other investments, there are risks, and outperformance is not guaranteed. That said, introducing alternatives into a more “traditional” portfolio can offer meaningful diversification benefits in addition to return potential.

As stated previously, ‘alternatives’ is a broad category within which many different asset classes exist, and it’s crucial to understand the unique aspects and risks associated with a specific market or strategy. The decision to incorporate them into your portfolio should not be driven by past performance alone.

The Liquidity of Alternative Investments Differs by Strategy

A common concern is that alternative investments are illiquid, meaning it’s difficult to sell or access your money quickly. While this is true to an extent, the degree of illiquidity varies considerably across investment opportunities. Depending on the asset class, investment vehicle, manager, and underlying strategy, liquidity can range from daily availability to years-long lockup periods and everything in between. Thus, it’s important to assess the liquidity needs of your investment portfolio and allocate to alternatives that align with your financial goals and time horizon.

When There Are Rewards, There Are Risks, Too

The risk profile of alternatives can vary significantly depending on the type of investment. For example, investment-grade real estate or infrastructure projects can offer stable returns with moderate risk, whereas investments in venture capital or distressed assets may come with higher risks but potentially greater rewards. Understanding the specific risk-return profile of each asset class and your own risk tolerance is key to making informed investment decisions.

Alternative Investments Have Been Around for Decades… And They Keep Getting Better

There’s a belief that alternative investments are completely unregulated, which might lead to concerns about safety and transparency. While alternative asset classes can operate within different regulatory frameworks than what investors are used to, there have been recent improvements to transparency, reporting, and regulations in the interest of investor protection.

The alternative investment landscape is changing – most notably in that it is now providing opportunities to investors who have not historically had access to these asset classes. As this new era unfolds, investors should consider evaluating alternative investment strategies as a source of diversified return while keeping their individual financial goals and risk tolerance front of mind.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.