The majority of Australian alternative investments are not appropriate for lower-risk portfolios, according to research house Morningstar.
"We do not believe that the majority of alternative strategies available in Australia are suitable for lower-risk investor portfolios, typically designated 'conservative' or 'moderate', given the embedded risks and complexity," Morningstar senior research analyst Julian Robertson said.
"For balanced, 50:50 growth-income split portfolios, an allocation of up to a maximum of 10 per cent could provide additional diversification and should come entirely from the growth component, although this needs to be assessed on a case-by-case basis."
None of the 14 strategies assessed in the Morningstar Sector Wrap-Up for alternative funds achieved a gold or silver rating. Five were designated a bronze rating.
Alternative strategies' stated objectives were often eye-catching and in many cases were set at very attractive levels, the sector-wrap said.
However, higher and more ambitious objectives did not guarantee greater returns, Mr Robertson said.
"An appropriately set objective should be practiced, realistic and tie in with targeted risk levels, providing a true representation of the underlying strategy," he said.
"Assessment of the level of targeted risk will help frame expectations about future returns."
In addition, alternative strategies were frequently marketed on the basis of being able to achieve absolute returns or perform better when growth strategies were underperforming, the sector-wrap said.
But over the past two years, when investors could have reasonably expected alternative strategies to deliver better absolute returns, only five produced a positive return.
Mr Robertson said it was also important to consider total costs, including any associated performance fees, as alternative strategies were generally expensive, relative to most other asset classes.
"Investors pay a premium for the complexity of the underlying process, the skill sets of alternatives portfolio managers and for obtaining exposure to sophisticated strategies usually beyond the reach of retail investors," he said.
