What are the pros and cons of investing in alternative assets for QDCP?

1 Risk and return

Alternative assets can offer higher returns than traditional assets, but they also come with higher risks. They are often less liquid, more volatile, and more complex than stocks, bonds, or mutual funds. They may also have higher fees, lock-up periods, or minimum investment requirements. Therefore, you should only invest in alternative assets if you have a long-term horizon, a high risk tolerance, and a thorough understanding of the asset class and the specific fund or vehicle you choose.

2 Diversification and correlation

Alternative assets can help you diversify your portfolio and reduce your dependence on the performance of the stock or bond market. They may have low or negative correlation with traditional assets, meaning they move differently or in opposite directions. This can help you smooth out your returns and lower your overall risk. However, diversification is not a guarantee of safety or success. Alternative assets can still suffer losses, especially during periods of extreme market stress or disruption. They may also have high correlation with each other, limiting your diversification benefits.

3 Taxation and regulation

Alternative assets can have different tax implications than traditional assets, depending on how they are structured and how they generate income or gains. For example, some alternative assets may be taxed as ordinary income, while others may be taxed as capital gains. Some may be subject to the net investment income tax (NIIT), while others may be exempt. Some may allow you to defer taxes until you withdraw from your QDCP, while others may trigger taxable events along the way. You should consult a tax professional before investing in alternative assets to understand how they will affect your tax liability and your QDCP balance.

4 Transparency and due diligence

Alternative assets can be less transparent and more opaque than traditional assets, making it harder for you to monitor and evaluate their performance, risk, and valuation. They may not provide regular or standardized reports, disclosures, or audits. They may also have more conflicts of interest, fraud, or mismanagement risks. Therefore, you should do your due diligence before investing in alternative assets and make sure you understand their strategy, track record, fees, terms, and risks. You should also review your QDCP agreement and plan rules to make sure they allow and support your alternative asset investments.

5 Flexibility and customization

Alternative assets can offer more flexibility and customization than traditional assets, allowing you to tailor your portfolio to your specific goals, preferences, and needs. They may also give you access to unique opportunities, markets, or strategies that are not available or accessible to the average investor. However, flexibility and customization also come with trade-offs. You may have less liquidity, more complexity, and more responsibility for your alternative asset investments. You may also have to deal with more uncertainty, volatility, and unpredictability.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?