Broadly defined, alternative investments are pretty much any investment outside of the traditional categories or investment strategies involving stocks, bonds, most mutual funds and cash equivalents such as certificates of deposit. Alternatives can include hedge funds, private equity, venture capital, commodities, limited partnerships, exchange funds, managed futures and direct real estate.

By their nature, however, alternative investments tend to be riskier than traditional investments or investment vehicles, so before investing in them you should understand them, be comfortable with them and make sure they are appropriate for your situation. Then why even consider them? Their key benefit is diversification, say many certified financial planner professionals. The patterns of returns in these investment categories typically don't correlate with those of stocks and bonds, and hence their presence in a portfolio can dampen volatility while at the same time potentially improving overall return.

Of course, many investors could improve their diversification just by broadening their selections within the traditional range of investments. In recent years, for example, many investors concentrated heavily on domestic large-cap stocks, including their own company stock, and then lost money in the last two years because they had no alternatives in their portfolio when the large caps stumbled. Traditional "alternatives" might have included small-cap stocks, real estate investment trusts (REITs), junk bonds, municipal bonds, and international equities and bonds.

For those investors for whom less traditional alternatives may be appropriate, the benefits and ease of investing in them have probably never been more apparent. Here are a few of the possibilities.

Hedge funds. Not widely understood by many investors and sometimes lacking traditional investment disclosures, most of these funds are designed to protect or enhance stock market gains through the use of derivatives, buying long and short, financial futures and other techniques. Once-high minimums have dropped to as low as $25,000 to $50,000.

Managed futures funds. These funds invest primarily in financial futures or commodity indexes and thus are riskier than more traditional investments.

Commodities. Futures and options in everything from pork bellies and wheat to gold and catastrophic insurance. They usually are highly leveraged and face challenging market, weather or disease factors. For most investors, commodities mutual funds provide the best avenue for investing.

Direct real estate. The argument for directly owning an office or apartment building, raw land, rental property or similar investment in real estate rather than through REITs or REIT mutual funds is that individual ownership of real estate performs differently and can provide ongoing tax benefits.

Limited partnerships. The same principle applies to limited partnerships as owning direct real estate: limited partnership shares in an oil and gas well in Texas, for example, behave differently than publicly traded shares in Exxon.

Private-equity funds. As the name implies, private equity involves buying into privately held companies, either through funds, which are essentially limited partnerships, or funds of funds. The three main versions of this asset class are buyout funds, venture capital funds and mezzanine financing.

Venture capital or angel investing. An alternative to private-equity funds is to invest directly in local start-up companies or small growth companies. As with so many alternative investments, the investment can be exhilarating and rewarding, but decidedly risky.

Although these and other similar alternative investments can provide benefits to many portfolios, they are not without their risks and challenges and are definitely not appropriate for many investors.

To begin with, fees typically are higher than for traditional investments because of the smaller economies of scale and active management. Investors often must meet minimum income and net worth standards to qualify as investors. Finding appropriate benchmarks can be difficult -- it's misleading to compare returns of alternative investments with traditional stock and mutual fund benchmarks such as the Dow or S&P 500. Investment minimums are typically much higher and the assets usually are more illiquid -- commitments of three to five years or more are not uncommon.

Many planners would advise that no more than 10 to 15 percent of a portfolio be committed to alternative investments, but financial advisors should consult with clients one-on-one to determine what, if any, percentage is appropriate based on the client's financial situation.