If you’re like most people, the majority of your investment portfolio is probably made up of stocks, bonds, and cash. But what if there was a way to diversify your holdings and invest in something other than traditional assets? Enter alternative assets. From real estate to precious metals, there are plenty of options available for the average investor. So don’t miss out – learn more about alternative assets today!
What are Alternative Assets?
Alternative investments is a term that refers to a variety of investments, which are different from long-only, publicly traded investments such as stocks, bonds, or cash (often called traditional investments). Alternatives are not necessarily rare or new additions to the investment world. Alternative investments include commodities and real estate, which are two of the oldest types.
Why Invest in Alternative Assets?
Alternative asset investing, or “alts”, has become more popular in recent years as investors strive for greater diversification through assets that do not correlate with the stock and bond markets.
Alternative investments can provide portfolio diversification, but they are riskier and more volatile than traditional types of investments.
Gold is often seen as a safe-haven investment during times of economic recession. When the stock market takes a hit, the price of gold usually rises. However, over longer time periods, such as the past 30 years, the stock market has outperformed gold significantly.
But if you look at long-term returns, the stock market has vastly outpaced the returns on physical assets like gold and real estate.
8 Types of Alternative Investments Everybody Should Know
Most people think of investing in traditional investments, such as stocks, bonds, or cash. These traditional investments are common for most investors, regardless of whether it’s the index fund in a 401(k), or the cash in a savings account.
But that’s just one part of the story. Another category of investing is alternative investments. Alternatives are one of the most dynamic asset classes. They offer a wide variety of investments with unique characteristics. Many options are becoming more accessible to individual investors, retail investors, and all investors. This makes it important for industry professionals and investors alike to be aware of them.
Although these types of investments may vary in accessibility and structure, they all share some key characteristics:
- They are not regulated by the US Securities and Exchange Commission.
- They are illiquid, which means they cannot be sold or converted to cash easily.
- They are not as closely related to standard asset classes. This means that they don’t always move in the same direction of other assets when market conditions change.
Alternative investments share many of these key characteristics, but they are also a diverse asset type. These eight types of alternative investments are worth learning about, how they differ and how you can view them as investment opportunities.
1. NFTs
NFTs stand for non-fungible-tokens and are assets that you own that live on a decentralized blockchain, with Ethereum being the most popular. The biggest marketplace in the space is Opensea where you can see the top ranking NFTs based on volume at any given time. The Bored Ape Yacht Club, by Yuga Labs, is the biggest brand in the space, where the NFT acts as a membership pass to their community. Another popular NFT community are the Lazy Lions who actually pay out a percentage of the trading fees they earn to their members each month.
2. Collectibles
Collectibles can include anything from rare wines to vintage cars, to baseball cards. Collectibles can be defined as physical items that are purchased and maintained with the hope that their value will increase over time.
Fractional platforms such as Rally and Otis allow investors to buy shares of assets, rather than having to purchase outright, which allows for greater diversification. However, liquidity becomes an issue with a lack of secondary trading. A newer platform Koia fractionalizes real world assets using NFTs which can be easily traded. Their first drop was fractionalizing a Rolex 2018 GMT-Master II Pepsi.
3. Private Equity
Private equity is a broad term that describes capital investment made in private companies or those not listed on a stock exchange like the New York Stock Exchange. Here are a few private equity subsets:
- Venture capital is a type of capital that focuses on early-stage and startup ventures.
- Growth capital is a type of capital that helps mature companies to expand or restructure.
- Buyouts to take over a company outright
Private equity is a partnership between the investor firm and the company that receives capital. Private equity companies offer additional benefits than just capital. Some of these benefits include mentorship, recruitment, and just overall expertise in your niche.
4. Private Debt
Private debt is investments that are not financed through banks (i.e. a bank loan) and are traded on the open market. The “private” part is not referring to the borrower of the debt, but the way the investment instrument is done. Private debt can be borrowed by both public and private companies.
Private debt can be leveraged by companies when they need additional capital to expand their businesses. Private debt funds are companies that issue capital. They typically make money through repayment of the loan, interest payments, or even selling the contract to other companies.
5. Hedge Funds
Hedge funds are investment funds that trade liquid assets and use a variety of investing strategies to earn a high return. Hedge fund managers have a wide range of skills that can be used to execute their strategies. These include long-short equity and market neutral strategies.
Hedge funds are only available to institutional investors such as endowments and pension funds, mutual funds and high-net worth individuals.
6. Real Estate
Real assets include land, timberland and farmland. Intellectual property, such as artwork, is also a type of real asset. Real estate is the most popular type and the largest asset class in the world.
Real estate is a fascinating category due to its size and equity characteristics. You can cash flow properties through rent, while also building wealth through equity. The goal is to increase the asset’s long-term value, also known capital appreciation.
Valuation is a challenge when investing in real estate. There are three types of real estate valuation methods: income capitalization, discounted money flow, and sales comparable. Each method has its advantages and disadvantages. It is essential to have strong valuation skills and to understand when and how to use different methods to become a successful investor in real estate.
7. Commodities
Commodities are natural resources that can be traded on commodities exchanges. Examples of commodities include oil, gas, corn, wheat, and gold. When investing in commodities, investors can purchase commodity futures contracts, take positions in commodity-focused exchange-traded funds (ETFs) or invest in commodity mutual funds.
Commodity trading is volatile because prices can rise or fall rapidly due to a variety of reasons. Corn prices can go up or down due to droughts or OPEC decisions.
8. Structured Products
Structured products typically include fixed income markets, which issue dividends like corporate bonds or government bonds. They also include securities or deriatives with an underlying asset, group of assets, stocks, bonds or market indices. Credit default swaps (CDS), and collateralized debt obligations are two examples of structured products.
Structured products are risky and complex investment products. However, they offer investors the ability to create a product mix that suits their specific needs. These products are most often created by investment banks and offered as a service to retail investors, hedge funds, and other organizations.
Although structured products are relatively new in the investing landscape, you may have heard of them since the 2007-2008 financial crises. Structured products such as CDOs and mortgage-backed securities (MBS), became more popular during the boom in the housing market before the crisis. Those who had invested in these products suffered severe losses when housing prices fell.
Other Alternative Classes:
- Foreign currency refers to currency that is not commonly used in the home country of the investor. Read our How to Invest In Forex guide for more information.
- Insurance products can include annuities and life insurance (such whole life). An annuity is a form of life insurance that a person buys. The premium will be paid back to the person over time.
- Derivatives financial contracts that derive their value from another asset or interest rate. These contracts can include options, futures, and/or forwards.
- Venture capital money is invested in startups and small businesses with a long-term growth potential. It involves high risk and high reward, and is usually financed by wealthy investors.
Diversification is essential, regardless of whether you choose to invest in traditional assets or traditional and alternate assets. Knowing the differences between the asset classes will help you make the best investment decisions.
Cryptocurrency as an Alternative Investment
Alternative investments have become more popular over the past decade for investors looking to diversify portfolios. Cryptocurrencies have been a popular alternative investment in recent years.
Why cryptocurrencies are a good alternative investment option
Despite the availability of many other investments, cryptocurrency is still a popular choice for investment. These are just a few reasons why cryptocurrency is a great investment option and why more people are using it as a diversification strategy.
- Cryptocurrencies are becoming more tightly regulated
Cryptocurrency is no longer the “wild west”. There has been an increase of regulation around cryptocurrency in recent years, with many cryptocurrency-related companies opting for regulation within their jurisdiction. Cryptocurrencies will likely offer more stringent regulation than other alternative investments in the near future.
- Now it’s possible to easily exchange cryptocurrency for cash
It is now easier than ever for cryptocurrency users to convert it to cash or spend it. It is much faster than other alternatives investments that are slow to access the funds. It would take many years to find a buyer for a rare collector’s item, for example. It can be difficult to determine the value. It is easier to find a buyer when you are selling cryptocurrency.
- Diversifying your investment portfolio
A diverse portfolio is essential for successful investing. A portfolio that lacks diversity will be at risk. The portfolio could be exposed during economic downturns and financial crises. These issues can be avoided by using cryptocurrency as an alternative investment. Cryptocurrency will react differently to economic factors than other investments in your portfolio.
- Join a growing market
The trading market is expanding as the cryptocurrency market matures. The trading flexibility and hedge options that cryptocurrency offers make it an attractive alternative investment option. It also offers some of the same benefits as traditional investments.
- Reputable organizations and companies are jumping on board
Blockchain technology is behind cryptocurrency and has many uses in multiple industries, including the financial sector. This technology has attracted the attention of major names like Google, Microsoft, Apple, and key payments institutions like JP Morgan and Mastercard. They don’t want their innovations to be lost so this would make it a worthwhile investment.
Important points to remember when investing in cryptocurrency
While cryptocurrency investment can be a non-correlated asset that can diversify your portfolio, it is important to only invest what you can afford. We believe cryptocurrency is a solid investment option because of its characteristics, such as Bitcoin’s growing adoption and use, low supply, and a stock to flow ratio that is similar to gold. Research has shown that Bitcoin makes it less volatile and increases your return.
Crypto as an Alternative Asset
While cryptocurrencies can be considered a high-risk investment as they are an alternative investment, they offer a higher return than other investments. Because they are strong and can weather any financial crisis, they make a great long-term investment.
It is easier to invest in and get the funds than with other investment options.
Although cryptocurrencies should not be taken lightly, they can offer the best of both traditional and alternative investments. Crypto has made investing more accessible to a wider range of people, and can bridge the gap between traditional and alternative investment.
Benefits of Alternative Assets
Alternative investments can offer greater portfolio diversification, lower overall risk, and higher potential returns. Alternative investments are becoming more prominent in the investing landscape and more accessible to different types of investors, making them increasingly important for both current and aspiring investors who want to advance their careers.
Why are alternative assets important?
Alternative assets are important because they provide investors with a way to diversify their portfolios. By investing in alternative assets, investors can reduce the risk of their portfolios by spreading their investments across different asset classes.
Conclusion
If you’ve been looking into alternative assets for building wealth, the above should give you some ideas on where to place your money to improve the return of your overall portfolio.
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