Alternative investment

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An alternative investment refers to types of investment products that are not part of the "traditional" list of investments (stocks, bonds and money market instruments) common in the public eye. While there is no definitive list of investments that are alternative, the label is typically applied to products such as commodity futures, currency foreign exchange, hedge funds, real estate, and venture capital.

Conventional wisdom often states that alternative investments are higher risk than traditional ones. However, risk is not so simply divided between investment types. Poor risk management in the stock market can be just as fatal to a portfolio as the same behavior in a futures market. Limited exposure in an alternative investment could prove no riskier than the addition of bonds to a portfolio. Overly conservative investments can increase the risk of "opportunity loss", where little is gained in times where more could be made. It might be more accurate to view alternative investments as generally more volatile in nature, but risk is related both to the investment environment and the investment decisions that are made.

Conventional wisdom also frequently views alternative investments as either uncorrelated or negatively correlated in behavior to traditional investments: As the stock market falls, alternative investments will rise in value. This, too, is an inadequate model. Some alternative investments do not follow (or invert) the stock market but some may, depending on the circumstance, even when that was not the intention. Correlation is often dependent on both the specific configuration of the investment and the way it is used.