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Alternative investments consistently provide higher returns as well as diversification benefits to client portfolios Discuss this statement highlighting the most common types of alternative investments - Essay Example

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However, the turmoil that has engulfed financial markets since mid-2007 has and is likely to continue to reduce the…
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Alternative investments consistently provide higher returns as well as diversification benefits to client portfolios Discuss this statement highlighting the most common types of alternative investments
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Alternative investments consistently provide higher returns as well as diversification benefits to client portfolios Discuss this statement highlighting the most common types of alternative investments

Download file to see previous pages... e negatively influenced – no matter even the limitation in these products’ performance is high or low; the examination of the investors’ preferences under normal market conditions has led to the assumption that alpha returns is likely to be preferred as an investment tool instead of beta return. The nature and the performance of this investment product can be used in order to explain the increased interest of investors on alpha returns. However, under the influence of the current financial crisis, the attractiveness of alternatives and structured products has been reduced showing the strong dependency of investment decisions on the market conditions.
In order to understand the increase in clients’ preferences on alpha returns it would be necessary to refer primarily to the characteristics of the specific investment; in accordance with Dorsey (2007, p.5) ‘alpha often is a virtual catchall for the return generated by an alternative investment that is not considered to be related to equity beta’. The above type of alternative investment seems to be preferred by investors – instead for the beta return; this differentiation on the investors’ preferences can be explained by analyzing the characteristics of the specific two investment products. The term beta return reflects ‘beta is the amount of return for a security or fund that is explained by its benchmark or component benchmarks’ (Dorsey, 2007, p.6); in other words, the main difference between the alpha and the beta return is that the former focuses on the factors influencing the performance of a specific investment while the latter refers to the market prices in general. In this context, the alpha return is likely to be preferred by investors as it offers a clearer view on the potential performance of a particular investment; the identification of the price of the market to which an investment is related is of secondary importance for the investors of the particular market.
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