The inclusion of alternative investments in modern portfolio allocation can significantly increase diversification because investors want returns that are not fully explained by traditional equity and fixed-income holdings. Alternative investments are here defined as financial assets outside stocks, bonds and cash (e.g., hedge funds, private equity, private credit, real estate, commodities and infrastructure). Although these assets improve diversification and have attractive return potential they also come with risks which are often harder to observe or manage than those of traditional securities such as market risk, liquidity risk, credit risk, leverage risk, currency risk and interest rate rise plus non-linear/asymmetric return distributions. Derivatives like futures, options, forwards and swaps allow investors to hedge specific components of this risk without liquidating the underlying positions. This review synthesizes existing literature on derivative-based hedging to test whether it improves risk-adjusted returns of portfolios containing alternative investments. The literature suggests that hedging effectiveness depends on the relationship between the hedging instrument and the exposure being hedged, hedge ratio achieved, investment horizon and market conditions. Hedging costs are incurred, volatility reduction does not translate into improved risk-adjusted return because hedging also requires upside participation so volatility reduction doesn’t lead to higher risk adjusted return. From hedge funds, commodities and equity-linked strategies evidence shows that hedging is generally more reliable where underlying risk is systematic and hedging instrument tracks exposure closely but less reliable where risk is idiosyncratic, illiquid or hard to observe which is common in private equity and private credit. In general the literature seems to indicate that derivative-based hedging can enhance risk-adjusted returns of alternative-investment portfolios only if it is applied to identifiable systematic and hedgeable risks, costs are taken into account and so on. Hedging should therefore be viewed as a tool for managing risk exposure and improving efficiency in portfolio management rather than as a guaranteed means of increasing dollar returns.