Why might an investor choose alternative investments?

An investor might choose alternative investments primarily to diversify their portfolio and pursue higher returns. Alternative investments, which include assets such as hedge funds, private equity, real estate, and commodities, typically have a low correlation with traditional asset classes like stocks and bonds. This characteristic allows investors to spread their risk across different markets and sectors, potentially reducing overall portfolio volatility.

Moreover, many alternative investments are designed to generate higher returns by employing unique strategies and accessing opportunities that are not available in traditional investments. For instance, private equity may involve investing in startups or undervalued companies, which can lead to substantial returns if those companies succeed. The focus on both diversification and the potential for enhanced returns makes alternative investments appealing to those looking to optimize their investment strategy beyond the conventional approach.

This rationale does not support the others; for example, seeking guaranteed profits runs contrary to the inherent risks associated with alternative investments. Additionally, focusing solely on domestic markets limits the benefits of diversification, as many alternative investments provide global exposure. Lastly, while lower risk and volatility can sometimes be a characteristic of certain alternative investments, this is not universally true; in fact, many alternative investments can involve higher risks. Thus, the combination of diversification and the pursuit of higher returns solidifies the rationale behind choosing