Alternative investments are a broad-based sector of financial strategies that go beyond the traditional bond and equity investments and include commodities.

These tools have gone from an obscure area of portfolio diversification to a growth business and a viable solution to risk diversification. The industry has grown to close to 6,000 managers globally with over $400 billion in assets, mostly between 1999 and 2003. Due in great part to poor returns from the stock markets in the past few years, alternative investments have established itself as a viable asset class.

Portfolio theory states that investors can improve portfolio performance by diversifying across unique asset classes. Diversification and risk-adjusted returns can be achieved by choosing assets that correlate negatively and are liquid. This will reduce portfolio risk without necessarily reducing expected returns. Commodity futures prices, which tend to have low correlations with capital markets investments, are highly liquid and are considered an inflation hedge since the overall inflation rate is dependent upon prices of all physical commodities.

Commodities in the portfolio accomplish two requirements for a risk-adjusted return: They have low correlation to capital market products and spread risk through diversity and liquidity.

The following articles written by academics and experts in the field of alternative investments are provided to enhance understanding of the value in diversification using the instruments provided by the New York Mercantile Exchange.