What is an alternative investment?

Alternative investments are non-traditional capital investments that extend beyond traditional stocks, bonds and mutual funds. Such assets are typically used by advanced investors to diversify their portfolio..

The main reason for investing money in alternative areas is the possession of certain assets that do not “jump” up and down under the influence of the atmosphere in the stock market.

Despite its name, these investments are not at all exotic and not complicated. They are added to investment portfolios to diversify and are valued because their value is not correlated with stocks and bonds. We will show you 9 options for alternative investment, tell you how they work and for which investors may be of interest.

Hedge funds

A hedge fund is something like maximum investment mutual funds. Hedge funds take money from investors and buy securities, like mutual funds, but the success of a hedge fund is determined more by the skill of the manager than by working in the market as a whole.

Benefits:

• As a rule, they are less regulated and limited than mutual funds.
• Usually they can buy almost any investment asset they want.
• Often they are led by managers with superstar status in their direction.
• Traditionally designed to eliminate correlation with common markets.

Disadvantages:

• Investors do not always know exactly what assets are in the possession of the fund.
• Investors often have limited access to funds..
• Can be quite expensive: the traditional hedge fund pricing model provided for 2% annual fee + 20% profit.

For whom is this option preferable

Hedge funds are designed for “complex” investors who work on a sophisticated investment strategy. In most cases, to participate you must be an accredited investor, which means you need to have a minimum level of assets and income.

precious metals

Precious metals like gold or silver are not only a beautiful basis for prestigious jewelry and products. They can also be independent investments..

Benefits:

• Widely regarded as an option for insurance against inflationary shocks.
• Does not correlate directly with stock and bond markets.

Disadvantages:

• There is no way to receive dividends or in any other way to make a profit.
• Compared to the stock market, have low long-term returns.
• It can be very expensive if you want to store them (plus high fees).

For whom is this option preferable

Precious metals are best suited to investors who want to insure their position in other investments, especially during a period of sharply rising inflation..

Futures

Futures are contracts in which buyers and sellers agree to exchange an asset in the future at a specified price. Futures are often used to hedge (insure) other investments if the investor expects a price reduction in the future. They can also be used to reflect on future price fluctuations..

Benefits:

• May act as an insurance tool for your other assets.
• Credit and margin requirements mean that you only need to make part of your investment.
• Very liquid market.

Disadvantages:

• Speculative assets.
• You can lose more money than was originally invested.

For whom is this option preferable

Futures can be used by investors who want to insure other investments, as well as those who expect to receive speculative profit.

Commodities

Commodities are products such as oil, gas, wood, coal, soy, wheat, etc. They include a wide range of raw materials and natural resources. You can independently buy raw materials or invest in funds that work with them.

Benefits:

• It is possible to get very good returns.
• Good inflation insurance.
• Diversified in comparison with other asset classes.

Disadvantages:

• Items can be very volatile..
• They carry a wide range of risks associated with, inter alia, unrest, the situation inside the country, and international currency.
• Fund manager may use speculative futures.

For whom is this option preferable

Investors looking for diversification and alternative investments in unconventional markets are good candidates for investing in commodities..

The property

Real estate is land and / or its buildings. From the point of view of investments, real estate can either be bought directly or through various investment instruments, for example, real estate investment trusts.

Benefits:

• Real estate can provide cash flow through rental income.
• Real estate allows you to cope well with periods of inflationary growth..

Disadvantages:

• Individual properties may fall dramatically.
• Real estate is generally more illiquid than other investment options..

For whom is this option preferable

Such assets are well suited for investors who believe in the long-term “health” of real estate markets and seek to diversify their portfolio. And investors who do not yet have their own real estate can benefit even more from diversification..

Collecting

Collectibles are rare coins, works of art, antiques or alcohol..

Benefits:

• You can satisfy personal collecting desires and aspirations.
• Collecting, as a rule, has nothing to do with stock and bond markets, therefore, does not correlate with them.

Disadvantages:

• Asset acquisition may cost a large commission.
• The value of some collectibles, such as coins, may be limited by the intrinsic value of their metal.
• May be illiquid.
• May have higher tax rates on sale than income from any other profit options.

For whom is this option preferable

Such alternative investments attract collectors who give works of art emotional value. But they can also traditionally complement them with their investment portfolios. Some collectibles have truly enormous price tags..

Crowdfunding

Crowdfunding platforms allow investors to own some of the young startups. Whereas earlier, young companies could receive financing only from the “British investors” or venture capitalists, now they can collect money from any sources.

Benefits:

• In the future, a startup can have huge profits. Especially if the company goes IPO.
• Crowdfunding allows absolutely any investor to get access to young companies.
• Most platforms have an extensive menu of different investment options..

Disadvantages:

• Startup can be very risky – the investor risks losing all his investments.
• About half of all startups fail during the first four years of operation.

For whom is this option preferable

Alternative investments in crowdfunding platforms are a good option for investors who are looking for access to new companies planning to develop and launch a product that meets their values and interests..

Venture capital

Venture capital companies (venture capital funds) are a bit of an advanced version of crowdfunding platforms. The leaders of such firms collect money from investors and invest them in companies at different stages of activity.

Benefits:

• Professional managers are more effective when it comes to finding promising young companies.
• These are alternative investments that can provide higher returns than other asset classes..

Disadvantages:

• It can be difficult to access top-tier VC (venture capital) companies with high investor requirements.
• Investing in startups is inherently risky and volatile.
• Funds usually work with investors who have large personal capital.

For whom is this option preferable

Venture capital funds are an option for experienced investors who can cope not only with highly profitable, but also with high-risk capital.

Private equity

Investing in private shares means buying shares in companies that do not trade on public stock exchanges. This can be an interesting option to participate in the development of a new company..

Benefits:

• May offer potential for high returns, especially if the company ultimately becomes public during the IPO.
• Private companies do not need to disclose their performance to the public.

Disadvantages:

• High risk investing.
• Success may require years of investment..

For whom is this option preferable

Private capital is suitable for investors who wish to take on additional risk in exchange for potentially high returns. It is also a suitable option for those who can afford to fulfill long-term investment obligations..

Despite the fact that the focus of financial publications is focused on stocks and bonds, there are many alternative investment routes in the world. Most of them offer trading schemes that do not correlate with traditional markets, and each also has a number of pros and cons.

What is an alternative investment? – 9 real life examples.