Diversification is a risk management strategy that involves spreading capital through different sources of return and risk. By doing this, the investor is targeting different types of investment strategies and industries, which will avoid the simultaneous fall of all the investments. Normally, alternative investments are the counterweight for traditional investments in bonds and stocks.
It is extremely important to make sure your portfolio is diversified.
Why? Many assets and many asset classes move together, which means that investing in them may not reduce your overall risk. The full benefit of real diversification relies on investments that are not correlated. If you invest in the stock market, for example, you can pick and choose dozens of different companies but at the end of the day, they all tend to follow a major economic trend. This is where hedge funds and alternative assets play a major role – helping you to diversify in order to lower the risk and increase returns.