What are the Risks and Benefits of Alternative Assets?

Abstract

This paper explores the risks and benefits of alternative assets (private equity, hedge funds and cryptocurrency), and assesses whether they are worth investing in. The evaluation of the safety of the investments was done with the use of different measures of risk, such as maximum drawdown and standard deviation. I also calculated Sharpe ratio to compare different kinds of assets and correlation between them to understand how they would fit in a portfolio. The analysis shows that though cryptocurrencies (especially bitcoin) show very high returns, the risk of fall is too large to consider them as safe investments. Broadly speaking, the safest type of investment in alternative assets are hedge funds as their main goal is “to hedge risks”. Private equity is much riskier than hedge funds, but its returns are more likely to be higher. Even with the safer investments, picking the right funds becomes crucial as performance of top-quartile funds and the others tend to differ significantly. Correlation is high between hedge funds, private equity and stocks, and low between bitcoin and other types of assets. In general, the market of alternative assets is very prospective and investors should consider them as possible diversifiers in their portfolios.