Alternative Investments & Volatility

I’m trying to understand the distinction between these two statements in the CFA readings about Alternative Assets, which seem contradictory to me at first glance, appreciate any help…

In relation to a shift in asset allocation from 60/40 equities/fixed-income to 50/20/30 equity/fixed-income/alternative assets, the readings state:

(1) pension portfolio volatility will be reduced b/c of lower correlation among asset returns

(2) [including] alternative investments entails greater manager selection risk and larger dispersion of returns around the policy benchmark

What am I missing?

The entire portfolio will have lower volatility where the correlations among the asset classes is low (think back to that ugly portfolio variance formula); the alternative asset class on its own will have high volatility and might go outside the benchmark for the alternative asset class.

Thanks that makes sense. I still don’t understand the relevance of mentioning the volatility of the asset class in isolation. Maybe for short term liquidity considerations

Thanks for this post. It is very helpful to us.