What are alternative investments?
Alternative investments are financial assets that cannot be classified under the conventional financial assets people usually invest in. Conventional investments like stocks, bonds, and cash are easily converted to cash. But other types of investments like art, antiques, venture capital, hedge funds, and other commodities would fall under alternative investments. Real estate is also often classified as an alternative investment.
Who chooses alternative investments and why?
Alternative investments are often sought by investors who are looking to diversify their investment portfolio and who want higher returns than what they can achieve with traditional investments. However, alternative investments are typically more illiquid (harder to convert to cash) and have higher risk than traditional investments.
Alternative investments by nature have fewer buyers. The niche market is primarily made up of wealthy individuals and institutional and accredited investors who understand the complex nature of the commodities they are investing in.
Alternative investments may have high minimum investments and fee structures. In some cases, alternative investments are open only to accredited investors – people with a net worth exceeding $1 million or with an annual income of at least $200,000 ($300,000 if including spousal income).
Types of Alternative Investments
Real estate includes investment in physical properties, real estate investment trusts, and mutual funds. Capital appreciation (increase in an asset’s market value) is one of the main attractive features of real estate investments.
Commodities are basic goods or resources like precious metals like gold, oil, electricity, and agricultural produce with real-world use in multiple industries. Commodity prices can change unexpectedly due to factors like supply and demand, economic conditions, and political uncertainty.
Farmland can be a valuable investment in two ways: it counts as real estate and you can generate income from the agricultural produce. This way you’re able to get both operating income and income from produce sales.
Collectibles include art, antiques, stamps, coins, and memorabilia. These items come to have value because of their historic significance and rarity, which only increases as time passes.
Venture capital investment is where investors provide capital to startups in exchange for equity instead of investing in traditional and already profitable companies. This is an investment in which the high-risk associated can potentially lead to high-reward.
How reliable are alternative investments?
Alternative investments are attractive because they help diversify investment portfolios. High risk also means high returns if markets are favorable. However, there is relatively less or even no regulation with any type of alternative investment, leaving investors more prone to risk.
Even though alternative investments fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and are also subject to examination by the U.S. Securities and Exchange Commission (SEC), they don’t need to register with the SEC.
Alternative investments are prone to risk by nature, so it’s advisable to thoroughly vet them before committing.