Allocate 15% to alternative investments

Hedge Funds and alternative investments are all the rage at the moment as they have low correlation with the so-called traditional asset classes like shares and fixed interest.

Hedge funds, for instance, are so popular that there is a new one coming to market every day in the United States and there are more than 5000 of these types of funds worldwide.

Determining what is an alternative investment itself is sometimes tricky, as is the question, how much money should be allocated to this area.

Blue Peak Alternative Investments general manager Hugh Latimer says the category of alternative investments is broader than just hedge funds, and includes private equity and infrastructure investments.

Latimer says that investors should have about 10% of their portfolio in alternative investments, and that figure could be higher for investors with long term horizons.

Quoting a William M Mercer report Latimer says that an investor with a 25-year time horizon could have up to 15% of their investments in alternative assets, while an investor with a 5-year time horizon should have none.

Latimer recommends a softly, softly strategy.

The three key tenants of the strategy being:

• Have one or two alternative investments in your portfolio
• Buy small amounts until you feel comfortable with the manager
• As confidence builds allocate more capital.

While alternative investments are the latest buzz they are not without risk.

The potentially negative features being that they are so-called "lumpy assets" and have high volatility of returns.

Also many, such as private equity, are illiquid and suit patient investors.

Perhaps the biggest turnoff is the complexity of the investment process, this is particularly true with hedge funds.