Nowadays, there are numerous investment options available for everyone. Different legal investment choices are abundant, and the only thing left for you is to pick. But what if you don’t like the traditional choices or looking for something more?
Fortunately, prospective investors have alternative investments to choose from. The interest in these investments grew recently due to the volatile traditional stock and bond markets in 2020. However, alternative investments are different from the ones in traditional markets, which means investing in them is new terrain.
Learn
more about them in this beginner's guide about alternative investments.
Definition and understanding alternative investments
Alternative investments are financial assets that do not fit into a conventional investment category. These can include venture capital, hedge funds, derivatives contracts, commodities, managed futures, and often, real estate. These investments are also not as regulated as traditional ones.
Because of their lack of regulation, complex nature, and degree of risk, alternative investments are held by institutional investors or accredited high-net-worth individuals. Many of these investments also have high minimum investments and fee structures compared to exchange-traded funds (ETF) or mutual funds. However, their transaction costs are typically lower due to lower turnover levels.
Alternative
assets can also be difficult to value. That’s because transactions involving
them are rare, except for a few like real estate.
Types of alternative assets
Here are the types of assets you can choose from for alternative investing:
Private equity
Private equity invests in non-public traded companies. Transparency is an issue with this asset due to the unavailability of investors’ money while waiting for the private equity to sell its holdings in public.
Venture capital
Venture capital is a sub-category of private equity which invests in companies that are in their early stages with oversize growth potential. This investment asset has a high chance of failure because such companies may not have revenues or profits yet.
Real estate
Real estate is considered an alternative asset when people buy investment properties.
Commodities
Commodities are also considered an inflation hedge due to them being real assets. Examples of such are natural resources like coffee, corn, and crude oil.
Hedge funds
Most
hedge fund investment strategies involve offering a return to serve as a buffer
when traditional assets fall. There are 16 common hedge fund investment
strategies that include absolute return strategies in various asset classes for
generating return regardless of how traditional markets are doing.
Pros and cons of alternative investments
Based on their characteristics, here are the benefits and drawbacks of investing in alternative assets:
Pros: Diversification and exposure to unique investments
Alternative investments are great additions, especially if you’re looking to diversify your portfolio. However, it’s advisable to keep a careful eye on them because there’s no promise that they’ll perform well when traditional markets go down.
Another benefit it offers is the exposure you’ll have in unique investments. Alternative assets allow access to markets some investors won’t normally be able to invest in that can pay big returns.
Cons: Long-lockups and complexity
Although alternative investments can enhance returns, they tend to lock up your money for a long time before you can get returns. That’s why you should consider the premium you’ll get from the liquid public markets first.
Alternative
investments are also more complex than traditional ones. You’ll have to do your
due diligence, and even then, you may not be able to mitigate potential risks.
Wrap up
Every investment has potential and risks; it’s up to you to decide which one is the better choice. If you think you can take the risk, explore alternative investments. Just remember to stay updated to keep learning about them because the information will help you make better decisions with these investments.
Author’s
Bio:
Deinah Storm works in the corporate industry. She has quite a bit of knowledge about finance and investments as she worked for a finance and investment company before. Today, she finds solace in writing and educating others about wise financial planning and alternative investments.
