Alternative investments are typically investments in assets classes other than traditional stocks, annuities, bonds and cash. The alternative investment market involves investment strategies that differ to traditional methods and follow their own path, as a result, it is notable that alternative asset classes are generally unregulated and carry a higher degree of risk. Having said that, they do offer the potential for a far greater ROI (return on investment).
These types of investment can help you to expand your portfolio by lowering the general volatility of the portfolio when common assets like bonds and stocks are under performing.
Historically, alternative investment asset classes have been restricted to sophisticated investors and HNWIs (High Net Worth Individuals), but the trend has changed and they are now available to general investors. Most individuals are fascinated by the alternative investment market because it can yield a higher ROI than traditional investments, but remember that a high ROI may also come with significantly high risks.
What is essential to note is that some alternative asset investments may not be easily converted into cash in comparison to their traditional counterparts and some may necessitate an investor to hold them for a prolonged period of time before finally being converted into cash. In addition, most alternative investments come with various tax consequences and particular fees.
Examples of Alternative Investments
- Private equity or venture capital
- Hedge funds
- Property and real estate
- Art and antiques
- Fine wine
- Derivatives contracts
- Crypto currencies
There are numerous alternative investment products available in the present market. With this, it becomes much more challenging to recognise the types of investments that are alternative or conventional. Below is a more detailed explanation of prevalent alternative investment assets along with their potential pros and cons.
Including a small section of your investment portfolio with precious metals like gold and silver may significantly offset the performance of other assets in the categories, since valuable commodities like gold do not move in a cycle with standard investments.
Gold is commonly regarded as a hedge against currency fluctuations and inflations. As a result, when inflations affect the buying power of a particular currency – say the euro weakens against the dollar – the price of gold tends to rise. Therefore, it is common to find HNWI and sophisticated investors investing their money in gold during market and economic downturns.
Investing your money in gold can be attained in several ways, including mutual funds, exchange-traded funds, future funds, coins, and bars. However, the prices of precious metals usually change dramatically because the metals only form a small market sector. This kind of volatility can create chances for investors in the form of high returns, but it can also equally lead to dramatic losses.
Managed Futures Funds
Managed futures involve high risks, are speculative in nature, have limited liquidity and may carry high fees. Nonetheless, managed futures investments have been the most preferred type of investment for institutional shareholders and HNWI over the last couple of decades. Their appeal comes from their ability to offer an investor a broad diverse portfolio by enhancing exposure to worldwide investment openings. There are several investment categories of managed futures in terms of investment and structure.
Hedge Fund Offerings
Hedge funds have only been historically available to institutions and HNWI. Hedge funds are typical investment pools that handle money for institutions like insurance companies, banks, as well as sophisticated and high net worth investors.
Hedge funds are usually planned as restricted partnerships where the capitalists are the limited partners and the fund managers are the general partners. Hedge fund investments tend to possess limited liquidity on an arranged basis. Due to this, these investments are subjected to particular regulatory requirements which are different from mutual funds.
Hedge fund offerings are invested into a wide variety of categories, it incorporates many asset classes and tactics with the sole purpose of lowering the overall fund risk via increased diversification. The hedge fund offerings are only available to stockholders that meet the accredited net worth standards. Notably, the fees involved in hedge funds are incredibly high due to the increased trading costs and type of portfolio management involved.
Property & Real Estate
Investing into property and real estate (both residential and commercial) can be a good form of diversification, it is less effected by stock market fluctuations and can offer immediate cash returns by way of rental income and long term capital growth via house price inflation.
Commercial real estate is a popular type of alternative investment. Until a few years ago, property investment in real estate was unreachable to general retail investors and was only enjoyed by HNWIs and sophisticated investor. Since the inauguration of REITs (real estate investment trusts), investing in the commercial real estate market has become readily available to a wide range of capitalists.
REITs acquire money from shareholders and then invest it in any property that ranges from apartment complexes to office buildings to warehouses and hospital facilities. REITs are available to stockholders in two forms: traded and non-traded. The two ways provide exposure to realty assets.
In the secondary market, people can easily buy and sell publicly-traded REITs. Nonetheless, they tend to be much more volatile. On the other hand, you can opt for the non-traded REITs if you are a shareholder that prefers a prolonged investment time of more than five years because the items are illiquid. Besides, the non-traded REITs provide a fantastic diversification to a portfolio because they’re not affiliated to bond and stock market movements.
The Mutual Funds with Alternative Strategies
Mutual funds are available in various asset categories, including commodities, property and real estate. Some mutual funds take after fund strategies and may be a fantastic option for the individuals interested in alternative investment but do not meet the ascribed investor standards.
In contrast to hedge funds that demand high fees and possible limited liquidity, mutual funds are very liquid and are cheaply affordable. Investors can easily purchase and sell them in a public market. Due to this aspect, the funds are easily accessible to a prevalent range of shareholders.
However, mutual funds with alternative strategies do use features of hedge fund investing like employing both short and long-term investment tactics, short selling, and sophisticated trading derivative products. If you are looking forward to offsetting market swings or particular sector swings and you undeniably understand the risks involved in placing your money in the alternative investment market, it would be wise for you to considered adding alternative mutual funds to your portfolio.
Alternative investments are generally used to run alongside and complement traditional investment strategies such as fixed-income products.
Your investment portfolio should naturally contain conventional investments such as bonds and stocks both equally essential parts of a long-term, solid investment strategy. Other less-common alternative investments can complement your portfolio and offer you incredible chances to lower some of the typical impacts of market variations.
Investors seeking stable income will find some investment alternatives to be much better than others, the same could be denoted for those capitalists searching for long-term, continuous capital growth.
It is always advisable though to consult with a qualified independent financial consultant, one that can properly advise you on the opportunities and risks linked to the specific asset class that interests you. As seen above, alternative investments can possibly enhance your portfolio returns while assisting you to lower your overall portfolio volatility and market exposure.