What are Alternative Investments?
When most people think about investing, they think of stock or bond markets. But there are other types of investment opportunities out there that you may not be aware of - these are known as alternative investments.
In this article, we’ll discuss what are alternative assets, why they can be beneficial investments, and the different asset classes you should consider.
Alternative investments, ranging from hedge funds to private equity and rare collectibles, enable investors to expand their investment portfolio and seek returns with low correlation to equity markets.
Table of Contents
- What are alternative assets?
- Types of alternative assets to consider
- Strategy for alternative investments
- Alternative vs. traditional investments
- Traditional investments:
- Alternative investments:
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What are alternative assets?
Alternative assets are investments that don’t fit into traditional categories like stocks or bonds.
They can include tangible assets like collectibles (e.g., vintage cars, luxury watches, rare books), commodities (e.g., gold or silver), art or antiques, and even cryptocurrencies.
These alternative investments tend to have a higher risk-reward profile than traditional investments because they are less liquid and often more difficult to value accurately. Illiquid assets mean that they cannot be sold quickly for cash, and are often de-valuated in the process.
However, they also have the potential for higher returns than traditional assets due to their uniqueness and rarity.
As we covered in Why the Stock Market Should Be On Your Radar: A Guide For First-Time Investors, portfolio diversification is key, regardless of your chosen investment vehicles.
Types of alternative assets to consider
There are many alternative investments available for investors to choose from. Some popular asset classes include:
Collectibles such as coins or vintage cars
Precious metals like gold and silver
Antiques, ranging from furniture to jewelry pieces
Timberland investment opportunities that involve purchasing plots of land
Hedge funds (pools of money managed by professionals fund managers)
Private equity investments (investing in private companies with high growth potential)
Venture capital (investing in start-ups with expectations for large returns)
Commercial real estate investments (properties used for business purposes rather than residential use)
Cryptocurrencies such as Bitcoin and Ethereum
Not all alternative assets are created equal. To get original, honest, and insightful research on 35 types of alternative investments, we highly recommend subscribing to the Alts.co Alternative Assets Newsletter.
Strategy for alternative investments
Both retail investors and accredited investors should aim to build a diversified portfolio over time. An alternative investment can help achieve this investment strategy.
Stock market movements from public companies can create panic, even for experienced hedge fund managers or high-net-worth individuals. One of the key characteristics of alternative investments is their low correlation to the public stock exchange.
Additionally, many alternative assets appreciate over time due to inflation. While stocks and bonds may experience periods of fluctuation in value due to public market changes or deteriorating economic conditions, these non-traditional investments typically remain steady or show signs of appreciation when publicly traded investments go down.
Lastly, whilst asset classes such as stocks can be viewed as traditional long-only investments, it can be possible to achieve high returns in the short term with alternative investments - but it isn't without risk. Therefore, most alternative investments can protect against volatility.
If speculative investment practices are not for you, read Understanding Risk-Free Assets: A Beginner's Guide
Alternative vs. traditional investments
Traditional investments are often traded on public markets; most are considered liquid assets. These are the most common ways for investing money or retirement savings. If you are responsible for managing your own investments, consulting with a financial advisor may help you choose the right financial asset for your portfolio.
They are heavily controlled by financial regulators such as the Securities and Exchange Commission (SEC). Examples of traditional assets:
Also known as stocks or shares, they give you partial ownership in a company. You may receive payments directly from these shares - known as dividends - or you may benefit if you sell your equity holdings for more than you paid, thus realizing a gain.
Public markets also offer the possibility to invest in exchange-traded funds (ETFs).
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Investment products that pool money from many investors to invest in underlying securities. Mutual funds come in many different styles, with different goals and costs (management fee). They are commonly available in investment accounts and some pension accounts.
They are debt instruments offered by companies or governments in exchange for money. They typically pay ongoing amounts - called coupons - until a specified date when the company will repay your initial investment.
On the other hand, private debt refers to any loans to or from private companies. It comes in many forms, but most commonly involves non-bank institutions making loans to private companies or buying those loans on the secondary market.
Related: Understanding Risk-Free Assets: A Beginner's Guide
Some alternative investments are not as risky as some people think, real estate comes to mind for example. However, most don't fall under the regulatory scrutiny of the securities and exchange commission, giving no protection if things go wrong. An alternative investment can be used by individual investors, accredited investors as well as institutional investors such as pension funds, endowments, and foundations. Let's explore some:
It is a tangible asset that you can own. It's often a long-term investment and can be used as collateral for loans. Real estate investing is the preferred option when it comes to real assets as it can provide a stable annual income
Physical Assets and Collectibles:
Tangible items that you can touch. Think of a car, a watch, or even fine wine. Collectibles are valuable due to their limited supply, often sold by collectors to other collectors. Examples include stamps, coins, and rare books.
Metals and Commodities:
Raw materials that can be used in manufacturing, energy, or agriculture. Examples include gold, silver, copper, oil, and natural gas. Many hedge funds invest in these assets because they're less correlated to other investments. Don't underestimate their potential return, as we've seen recently with agricultural commodity prices. Check this detailed article on how to invest in gold from our friends at Top Dollar Investor.
A type of alternative investment that allows investors to buy controlling interests in companies that are not publicly traded, as they typically trade on private markets. Private equity is usually structured as a limited partnership and sold to an accredited investor.
Private equity funds can invest in anything from real estate to healthcare to consumer goods and technology - and everything in between. Private equity firms specialize in these alternative investments.
You may also encounter private credit or direct lending, a type of loan that a non-bank lender provides to businesses, typically to small and medium-sized enterprises, that are not rated as investment-grade.
Alternative strategies that take a longer-term view of the markets. They're often described as alternative investments because they don't fall into any traditional investments category. Rather than buying and selling commodities, managed futures strategies make bets on how certain market indexes will move. Managed futures can be thought of as a form of investing that requires little maintenance but offers high yield potential, if you find the right portfolio company to manage your capital investment.
Venture capital is a type of private equity. It's an investment in a startup company - which is often experiencing rapid growth.
Venture capital investors know that this alternative investment can be high risk, but it can also be high reward. Whilst it may demand high minimum investments, this can be very appealing to investors looking for something different.
Early investors may benefit greatly if a private company eventually becomes public through an initial public offering (IPO).
Alternative investments can be an effective way for investors to diversify their portfolios while potentially reaping higher and faster rewards than more traditional asset classes like shares and ETFs.
Before diving into any of these other assets, however, you must do your research and extensive due diligence so you understand how each asset class works. This will help ensure that your decision is an informed one that has been made with your long-term goals in mind - speak to an investment adviser.
Whilst institutional investors (mutual funds, hedge funds, etc) can navigate easily through alternative investments, these can certainly be complicated investment vehicles for the average investor. Some may also be out of reach due to their high minimum investment requirements. Others present complex tax structures.
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With a well-diversified portfolio consisting of standard asset classes and alternative investments, you can rest assured that your wealth is well protected against market corrections or downturns, while still having the opportunity to grow through appreciation or other means.
Contributor: Akhlaq Mushtaq Qureshi
No investment Advice. This article does not provide financial advice and has been prepared without taking into account any person’s investment objectives, financial situation, risk tolerance, or particular needs.
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