Investing in alternative strategies for people in their 20s/30s

Question

I'm exploring alternative investing / trading strategies for my personal portfolio and had questions regarding their viability and appropriateness as a retail investor. Here's my risk / liquidity profile:

Asset allocation: The alternative portfolio is only supposed to be ~10-15% of the total portfolio. Rest of my portfolio currently is Indian Govt bonds only (~9% yield, taking BBB credit & USD-INR FX risk). I'm also considering a more balanced approach for the rest of the portfolio, but uncertain about the impending market correction before moving into US equities.

Risk: I'm okay with annualized vol of up to 30%. To give some perspective, the average annualized S&P vol is 15%, with highs of a bit more than 25% during the crisis.

Liquidity: I'm okay locking up money for a max of 3-5 years.

I'm considering alternative strategies like algorithmic trading, real estate / Equity REITs / Mortgage REITs, buying structured products (CLO equity) or via credit ETFs, P2P lending, buying OTM puts etc. I do realize that each of those strategies require in depth expertise, but if you had a good experience at an institutional level with these products, would it make sense to diversify with these asset classes / strategies?

One clear downside apart from not knowing what's going on with these products is the increased correlation and reduced liquidity in distressed times.

Answer 1

My equities portfolio breaks down like this: (I'm 26 years old, so it is quite aggressive)

  5% - High Yield Bonds
  12.5% - Large Cap Value Index
  12.5% - Large Cap Growth Index
  10% - Mid Cap Value Index     
  10% - Mid Cap Growth Index  
  25% - Small Cap Index    
  7% - International Large Cap Index   
  8% - International Small Cap Index   
  10% - Emerging Markets Index

Additionally, I have a portfolio of direct real estate investments I have made over the past 4 years. I invested very aggressively into real estate due to the financial crisis. As a result of my aggressive investing & strong growth in real estate, my overall asset breakdown is quite out of balance. (~80% Real Estate, ~20% Equities)

I will be bringing this into a more sensible balance over the next few years as I unwind some of my real estate investments & reinvest the proceeds into other asset classes.

As for the alternative asset groups you mentioned, I looked quite seriously at Peer to Peer lending a few years back. (Lending Club) However, interest rates were quite low & I felt that Real Estate was a better asset class to be in at the time.

Furthermore, I was borrowing heavily to fund real estate purchases at the time, and I felt it didn't make much sense to be lending cash & borrowing at the same time. I needed every dime I could get a hold of. :) I will give it another look once rates come back up.

I've shied away from investing in things like actively managed mutual funds, hedge funds, etc ... not because I don't think good managers can get superior returns ... rather, in my humble opinion, if they DO get above average returns then they simply charge higher management fees to reflect their good performance.

Hope this helps!