Basics of Alternative Assets

by | Jan 21, 2022

Basics of Alternative Assets

What is an “Alternative Investment”
An alternative investment is a financial asset that does not fall into the conventional investment category that consists of stocks, bonds, and cash, but rather into a variety of assets including commodities, art, venture capital, hedge funds, real estate, or private equity.

Why Invest in Alternative Investments?
Investors did not always have access to these private investments before due to them being reserved for larger offices or institutional investors. Now individual investors have significantly more options to invest within a broad range of assets.

Types of Alternative Investments

  1. Private Equity– refers to capital investment made into private companies as they provide industry expertise, talent sourcing, and mentorships.
  2. Private Debt– Investment of capital to acquire debt that is not financed by banks or traded in an open market.
  3. Hedge Funds– Investment funds that trade liquid assets seeking high returns on their investments.
  4. Real Estate is land and any improvements made upon the land. This is one of the world’s largest asset classes with a variety of price ranges allowing any type of investor an easier barrier to entry.
  5. Commodities such as oil, natural gas, metals, and agricultural products serve as a hedge against inflation and are not sensitive to public equity markets.
  6. Collectibles are assets that appreciate over time but can be destroyed or damaged if not taken care of properly. This may include items such as trading cards, vintage cars, or aged wine.

Benefits of Alternative Investments

  • Portfolio Diversification is a key reason why investors seek out alternative investments, helping reduce overall risk exposure across investments while also providing a hedge against inflation.
  • Less Volatility: as alternative investments are less volatile than stocks, they are a great choice for those investors looking for portfolio stability.
  • Better Returns: Alternatives generally offer a higher rate of return than traditional investments.
  • Direct Tax Benefits include pass-through depreciation and long-term capital gains treatment as an owner of the asset.