At a Glance —
- Alternative investments are an investment category which falls outside of the stock and bond market and traditional public exchanges
- There are numerous benefits to alternative investments, along with some potential downsides to consider
- To best support your investment strategy and risk mitigation profile, a deep understanding of any alternative investment is recommended
- Generally, alternative investments can help diversify your portfolio — an important strategy to help you protect your wealth from inflation and the changing trends of the economy
An alternative investment is defined as a financial asset that does not fall into conventional investment categories like stocks, bonds and cash. Alternative investments include a wide variety of assets including hedge funds, commodities, venture capital, private equity, private debt, real estate and collectibles.
Benefits of alternative investments.
Investors did not always have easy access to alternative private investments. Typically these kinds of investment options were reserved for institutional investors. Today, individual investors have significantly more options to invest within a broad range of assets. As an investment class, alternative investments offer a wide variety of benefits and potential risks which, depending on the asset, may include —
There are multiple types of alternative investments.
While there are a number of alternative investment options to help diversify your portfolio, each type of alternative investment requires a deep understanding along with various considerations in order to best support your investment strategy and risk profile, to help achieve your portfolio objectives. An overview of each type is below —
Hedge funds refer to normal investment funds that trade assets, most of which are liquid, using various other investment strategies. As with all investment funds, the investments of several investors are put together to make it possible to make more significant investments, collectively.
A hedge fund manager is skilled at using a wide range of strategies, including long-short equity and volatility arbitrage. Most often, only institutional investors can buy into these funds.
Commodities are quite a unique type of investment as they are based on real assets. Most goods are made from natural resources. There are various types of commodities for investing in, but the two most important ones are electricity and natural gas. People and businesses need these resources across the globe.
Venture Capital is a form of private equity focused on investing in an enterprise’s growth phase. Whenever a new business starts, it’s hard to know if it will succeed or fail. If you get in at the beginning, you may be able to make a lot of money. Institutional investors and people with considerable wealth give to venture capital firms. When these funds are accumulated, a venture capital enterprise can put money into a business at various stages of its growth to support the business’ success and investor income appreciation.
Private Equity is a type of alternative investment that includes every capital investment produced by private companies. A business that’s not directly traded on a public exchange is an example of such a company.
Growth capital is an available option to aid mature businesses in reorganizing or expanding. Or buyouts occur when a large corporation takes over a large portion or all of the business. They often give more than cash once private equity firms invest. Among the advantages private equity firms can provide are mentorship, industry knowledge, and assistance in recruiting top talent.
Private debt is an alternative to public debt because it is not publicly traded and not backed by a bank. Both private, as well as public companies, often borrow from private debt. The most common use of this type of debt occurs when a company needs additional funds to expand its operations. Private debt funds are organizations that provide private debt.
Real estate is a diverse investment option that lets investors personalize their strategy. Commercial real estate, while an alternative investment, possesses bond-like features. A property investment generally yields capital appreciation and rental payments can generate income.
Collectibles are typically physical assets that may appreciate over time but also can be destroyed or damaged or lost if not taken care of properly. This alternative investment group is vast but some examples include items such as trading cards, vintage cars, art and aged wine.
Ways of investing in alternative assets.
Alternative assets investment is less complicated than it may initially appear. There are a variety of non-conventional investments accessible to individual investors, though a substantial range of alternative investments are restricted to accredited or institutional investors. Find a reputable alternative investment platform that aligns with your investment goals and philosophy.
Bottom line —
While most of these alternative investments carry some form of risk, those risks are diverse across each class. This allows you to tailor the right mix for your individual portfolio objectives and desired risk to return goals.
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