Alternative Investments

Alternative investments span a wide variety of investment vehicles. It’s important to understand the risk involved when choosing to invest in alternatives.

Nonprofits face a very difficult choice when deciding whether to invest in alternative investments— particularly hedge funds. Nonprofits that rely on investments for current spending require a high level of return to maintain their impact. They may also be risk averse. It’s no wonder that investments that seek to earn “equity-like” returns while experiencing “fixed income-like” risk are appealing.

In our professional judgment, since the 2008–2009 financial market collapse, such alternative strategies have largely disappointed. As a result, nonprofits may reasonably question the wisdom of investing in speculative markets with little transparency, liquidity constraints, and high fees. At RWM, we believe that risk and return are directly related. As such, greater-than-market returns are only available by assuming greater-than-market risk. Larger organizations with the willingness and ability to take on greater risk and whose leadership maintains the sophistication necessary to understand non-traditional market risks may reasonably decide to allocate to alternatives.

In our opinion, however, any nonprofit—regardless of size or sophistication level—that reasonably decides to forgo allocating to alternatives is not doomed to suffer lower return expectation.

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