Alternative Investments: The new investing reality

With the return of market volatility, traditional investments may not be enough on their own. Faced with a longer life span, together with fully- or over-valued equity markets and low-interest rates that have been prevalent over the last decade, the average Canadian investor has become more focused on obtaining higher yields and diversification.

Traditional investments alone may not be the solution, particularly without adding risk. Investors should consider other asset classes and markets such as alternative investments that can add real value to a portfolio.

In simple terms, an alternative investment s any type of asset that does not fall into one of these categories: cash, stocks or bonds. Since alternatives tend to behave differently than typical stock and bond investments, adding them to an investment portfolio may provide broader diversification, reduce risk and enhance returns.

Once exclusive only to institutional investors and the ultra high-net worth investor, alternative investments are now within reach for many Canadians. The flurry of financial innovation, introduction of more affordable products and revised regulations have now made them more accessible to everyday investors.

Institutional investors, like the Harvard and Yale Endowments, have consistently achieved attractive annual returns and significantly outperformed a typical retail investor portfolio by allocating a meaningful160 percentage of their assets to alternative asset classes.

Over the last 20 years, these endowments have achieved annualized returns of roughly 52% and 83% higher than the return a retail investor would achieve holding a traditional US stock/bond portfolio
(60/40) (Graph 1).

Graph 1
Harvard and Yale Endowment Fund relative to a traditional 60/40 balanced portfolio - Graph

During the past 30 years, pension plans have achieved some of the highest returns. It is no coincidence that during the same time period, their allocation to alternative investments has also substantially increased to enhance returns and decrease volatility risk.

Canadian Pension Plans have significantly increased their investment in alternative assets, and as you can see from Graph 2, they have moved from just a 5% allocation in 1995 to 36% in 2017.

Graph 24
Historical Asset Allocations of the Average Canadian defined benefit Pension Plan

Institutions and endowments for some time now and have used alternative investments. Given their non-conventional nature and their ability to invest in ways and areas traditional investments cannot, alternative investments can improve the overall risk-return characteristics of an investment portfolio.

Notes and Sources

  1. The Yale Investment Office., accessed May 7, 2018.
  2. Harvard University:, accessed May 7, 2018.
  3. Harvard Management Company, Inc.: Annual Endowment Report – September 2016, Page 1.
  4. Pension Investment Association of Canada – Composite Average Asset Allocation, and, accessed May 7, 2018.