What are Alternative Investments?
Alternative investments are financial assets that don’t fit into traditional asset classifications like stocks, bonds, or cash. They include investment classes such as managed futures, hedge funds, private equity, venture capital, and collectables like art and antiques.
Types of Alternative Investments
1. Hedge Funds
Hedge funds are private, pooled investment funds that target high returns through various speculative and usually risky investing tactics. Investors’ funds can be invested in multiple assets, including currencies, startups, publicly listed stocks, and derivatives.
2. Venture Capital Funds
Venture capital funds provide money to potential startups in exchange for equity. They might participate actively in the management and provide essential knowledge, similar to private equity firms. They collaborate with the portfolio firm and track development, delivering investment rounds as soon as predetermined benchmarks are reached.
3. Peer-to-Peer Lending
Peer-to-peer lending, commonly called P2P lending, is a relatively new concept. Online P2P lending platforms provide loans for every purpose, whether for personal or business. Once the borrower is eligible, you can fund the loan by joining a group of eager investors to lend money to others.
4. Private Debts
Private debts are Investments that are not backed by banks or traded openly (i.e., not financed by a bank loan). It’s important to note that the phrase “private debt” refers to the investment instrument rather than the debt borrower because both public and private businesses can obtain debt using this method.
5. Collectables
Investing in collectables means buying and preserving tangible assets in the hopes that their value will increase over time. A few examples of collectables include rare wines, vintage vehicles, and fine art, amongst others.
Pros of Alternative Investments
1. Low Correlation
One of the biggest advantages of alternative investments is the low correlation with conventional asset classes. Commodities could be performing well while the stock market is under pressure.
2. Diversification
You can further diversify and lower overall risk by including alternative assets in your portfolio. The addition of alternatives can increase portfolio diversification because of their low correlation to the stock or bond markets. As a result, the portfolio will be less affected if one asset class suffers more than the others.
3. Less Volatility
Because alternative investments are less exposed to the general market, volatility may be lower.
4. Potential Higher Returns
Alternative investments have a greater potential for returns but carry a higher risk.
5. Inflation Hedge
Some alternatives, like gold, oil, or real estate, can help reduce the risk of inflation. You can also leverage commodity futures and options to protect yourself from rising or falling prices.
6. Tax Advantages
Investing in alternative asset classes like real estate could result in tax savings.
Cons of Alternative Investments
1. Higher Fees
Alternative investments can have higher fees than conventional assets. For instance, investing in a hedge fund can require you to pay a hefty management charge. This is because these assets are usually more complicated and need more effort from the manager.
2. Less Transparency
Understanding what is happening with your money may be challenging. Hedge funds, for instance, are not obligated to make their assets or business plans public. This lack of openness makes it difficult to comprehend what you invest in.
3. Not for everybody
Only some investors can go for alternative investments. They might not suit you if you are risk-averse.
4. Regulation
Alternative investments are vulnerable to fraud and investment scams because there aren’t many regulations in place.
Additionally, because they are less liquid than conventional securities, it could be challenging to even value some of the more unusual vehicles because of how thinly they are traded.
Alternative Investments ETFs
Alternative ETFs track indices that include long and short investment strategies, hedge funds, commodity funds, private equity, and real estate, among others. Since they are fundamentally non-traditional assets, accessing them has always been more expensive.
These ETFs offer investors a way to diversify their portfolios by exposing them to a range of assets that have the potential to deliver different returns and provide a hedge against market volatility.
Some examples of alternative investment ETFs include real estate investment trusts (REITs), commodity ETFs, and private equity ETFs.
What is the best alternative investment?
There is no one-size-fits-all answer to this question as the best alternative investment will vary depending on your investment goals, risk tolerance, and financial situation.
Is crypto an alternative investment?
Yes, cryptocurrency can be considered an alternative investment as it is not a traditional asset class like stocks, bonds, or cash. It is also high-risk and more volatile.
Are mutual funds alternative investments?
No. Mutual funds are not considered alternative investments.
đź’ˇ It’s important to note that alternative investments can be complex and carry higher risks compared to traditional investments. As with any investment, it’s important to carefully consider the potential risks and benefits before investing.
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