NEW YORK (MainStreet) — For many investors, it's hard enough to get a handle on traditional portfolio holdings: stocks, bonds, mutual funds and exchange-traded funds. And then there are "alternative investments." When a Jackson National survey of investors with portfolios of $200,000 or more asked respondents to choose a definition for the asset class, more than four in ten selected "I honestly have no idea what alternative investments means." About the same number admitted not even knowing if they held alternative investments in their very own portfolio.

It's no surprise that investors are confused. Alternative investments can be practically anything -- other than a stock, bond or cash. That's a lot of territory. Hedge funds, real estate investment trusts (REITs), oil and gas partnerships, commodities – even investments in start-up companies can be classified as alternative investments.

"Alt" mutual funds are included in the mix, but differ from hedge funds, because they are regulated under the Investment Company Act of 1940 which disallows certain holdings in a mutual fund and forbids the performance fees usually charged by hedge funds.

The alternative investment landscape is littered with the bones of broken promises. Not only do investors have difficulty understanding these offerings, the people selling them do too. FINRA, the self-regulatory authority of securities firms, has issued numerous fines for "supervisory deficiencies" related to the sales of alternative investments.

In March, FINRA fined LPL Financial just under $1 million for failing to supervise adequately the sale of alternative investments. In January, two St. Louis-based broker-dealers – Stifel, Nicolaus & Company and Century Securities -- were ordered to pay combined fines of $550,000 and a total of nearly $475,000 in restitution to 65 customers in connection with sales of leveraged and inverse exchange-traded funds (ETFs), another often-touted alternative investment.

Public pensions are also jumping on the alt bandwagon. The Pew Charitable Trusts reports the allocation to alternative investments in pension assets has more than doubled since 2006 -- rising from an 11% share of total pension investments to 23% in 2012.

"These changes in investment practice have coincided with an increase in fees as well as uncertainty about future realized returns, both of which may have significant implications for public pension funds' costs and long-term sustainability," the Pew report says.

And while alternative investments can result in greater financial returns, they could also present "increased volatility and the possibility of losses on these assets," according to the Pew research.

But proponents of alternative investments say a proper allocation can boost returns.

"The reality is that during the 2008–2009 financial crisis, an investor who had exposure to a broad range of alternatives would have been better off than an investor who was restricted to traditional long-only equity and fixed income investments," write Nancy Everett and Mark Taborsky in a Blackrock investment report. "Adding a variety of alternative assets and strategies to a traditional portfolio has the potential to enhance returns while reducing risk over the long term."

Don Blandin, president of the nonprofit Alliance for Investor Education (AIE), agrees but with a cautionary note.

"Investors should be aware of the considerable risks associated with some of the alternative investment options available in today's financial climate," Blandin writes on the AIE website.

"Often, investors find out the hard way that an alternative investment's potential does not always outweigh the dangers. There is a place in an investment portfolio for appropriate alternative investments but, as with any investment, investors need to understand what they are buying. They need to be aware that fraudsters are using the allure of returns for alternative products to draw in their latest victims. Investors should always exercise due diligence to make sure they are getting a legitimate investment."

--Written by Hal M. Bundrick for MainStreet