What role do alternative investments play in a typical high-net-worth portfolio?

Alternative investments are assets that fall outside the traditional categories of stocks, bonds, and cash. In a high-net-worth portfolio, they often play a crucial role in diversification and enhancing returns. Alternative investments can include private equity, hedge funds, real estate, commodities, and collectibles. They typically have a low correlation with traditional asset classes, meaning their performance is not closely tied to the stock market. This can help reduce overall portfolio volatility and improve risk-adjusted returns. Alternative investments often offer the potential for higher returns compared to traditional investments, but they also come with higher risks and lower liquidity. For instance, private equity investments involve investing in private companies, which can generate significant returns but are also illiquid and require specialized expertise. The specific allocation to alternative investments in a high-net-worth portfolio depends on factors such as the individual's risk tolerance, investment horizon, and liquidity needs.