When it comes to investing, people go for traditional investments types such as stocks, bonds, and cash.
An alternative investment is totally different from traditional investments type!
Alternative investments can be investments in tangible assets such as precious metals or wine.
In addition, they can be investments in financial assets such as private equity, distressed securities, and hedge funds.
Generally, alternative investments tend to show a low correlation with traditional investments.
In addition, some alternative investments come with extremely complicated valuation and are highly illiquid.
Due to such reasons, certain types of alternative investments are quite popular among financial institutions and high net worth individuals.
Features of Alternative Investments
- Low correlation with the traditional investments
- Relatively low liquidity
- High purchasing costs
- Complex Valuation
- Less Regulated
- Potentially problematic historical returns and data
- Higher Fees
Types of Alternative Investments
Alternative Investment #1 : Real Estate
Real Estate is the most common type and world’s biggest asset class.
Real Estate is an interesting alternative investment type.
It’s characteristics are similar to that of a bond – because property owner receive current cash flow as rental income.
Also, equity’s value appreciates because of increase in the long-term value of the asset, which is called capital appreciation.
Real Estate investments include residential or commercial properties as well as real estate backed debt.
Alternative Investment #2 : Private Equity
Equities are referred to as private equity funds when investors invest directly in private companies.
These equities are not listed on the exchanges and are regulated by industry-specific criteria.
An important part of private equity is the relationship between the investing firm and the company receiving capital.
Alternative Investment #3 : Commodities
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type.
Commodities are also real assets and mostly natural resources, such as agricultural products, oil, natural gas, and precious and industrial metals.
Considered a hedge against Inflation, commodities are not sensitive to public equity markets.
Commodities are hardly new to the investing scene and have been traded for thousands of years.
Amsterdam, Netherlands, and Osaka, Japan may lay claim to the title of the earliest formal commodities exchange, in the 16th and 17th centuries, respectively. In the mid-19th century, the Chicago Board of Trade started commodity futures trading.
Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.
Alternative Investment #4 : Hedge Funds
A hedge fund is a form of alternative investment that pools capital from individual or institutional investors to invest in varied assets, often relying on complex techniques to build its portfolio and manage risk.
Hedge funds are exclusive, available only to institutional investors, such as endowments, pension funds, and mutual funds, and high-net-worth individuals.
Hedge fund managers can specialize in a variety of skills to execute their strategies, such as long-short equity, market neutral, volatility arbitrage, and quantitative strategies.
Alternative Investment #5 : Private Debt
Private Debt is a form of loan: informal and formal.
Private debt can take many forms, but commonly take the form of credit card debt, corporate bonds, business loans, or personal loans.
It is provided by an individual or company, depending upon the relation of the debtor and the creditor.
Private debt has become a broadly accepted category to diversify assets and is now part of many asset allocation strategies.
The companies that issue the capital are called private debt funds, and they typically make money in two ways: through interest payments and the repayment of the initial loan.
Alternative Investment #6 : Collectibles
For those who thought stamps, artwork, and vintage wine are just prestigious souvenirs, think again! Hidden in these connoisseurs are astute investors who know the real value of these collectibles.
These investments may sound more fun and interesting than other types, but can be risky due to the high costs of acquisition, a lack of dividends or other income until they’re sold, and potential destruction of the assets if not stored or cared for properly.
The key skill required in collectibles investment is experience; you have to be a true expert to expect any return on your investment.
Conclusion : Investments Require Proactive approach
Investors can no longer simply rely on the market, close their eyes and hope everything will work out.
To be successful, investors need to be practical, proactive and progressive.
An appropriate allocation into alternative asset classes might be a good place to start.