There’s plenty of debate around what makes up an alternative investment. Most professionals would describe alternatives as investments in assets other than bonds, cash, and stocks. Another description would include some sort of attempt to ‘diversify’ their portfolio away from traditional funds. Here’s a closer look at 7 of the most popular alternative investments.
Generally speaking, alternative investments behave differently than stock and bond investments, so having them may provide you with a chance to enhance your returns and somewhat reduce your risk.
Hedge funds provide alternative ways to invest by participation in a variety of markets. These investments are sometimes structured as limited liability companies or limited partnerships and administered by a professional management team. Hedge funds typically are made available to certain accredited investors and cannot be accessed by the general public.
Hedge funds also attempt to earn a positive return regardless of whether the market is rising or falling. Some of the most famous hedge funds managers have made huge returns while the public equity markets crashed.
The ability to invest in private companies was once considered out of reach for the average investor. Access to investment in companies not listed on the public stock exchange is getting more accessible and more common. They call this form of investment private equity.
Investors gain the ability to focus on the long-term with private equity rather than quarterly earnings, which the public market is driven by. Some private equity funds require a set time period where your funds are not available for withdrawal. This can be a blessing in disguise as the investor is not tempted to sell out at the wrong time as routine ups and downs in a company play out.
Real estate can be a popular way to diversify your portfolio. The popularity of exchange-traded funds in the public markets allows access to real estate to almost anyone. There was a time when real estate was considered an asset class only for the wealthy, but that has changed dramatically in recent years.
There are many benefits to real estate beyond diversification. Cash flow from rental income can be a significant advantage over other investments that do not return cash. Along with cash flow, there’s also a possibility of capital gains. REITs can offer a combination of dividends, capital gains, lower barriers to entry, and liquidity in the case you need to sell.
Investing in commodities offers several benefits. They tend to provide protection against inflation and are not correlated with public stock market movements. The commodity prices usually rise and fall with supply and demand, so they are not linked to public stocks.
Index funds and exchange-traded funds tracking individual commodities are the easiest and most popular way to invest in the asset. Futures-based commodity funds bring exposure by purchasing futures contracts without buying the underlying commodity.
Fund of Funds
A fund of funds strategy holds a portfolio of other investment funds rather than buy public stocks and bonds directly. One of the ideas is to diversify between many great fund managers and benefit from a variety of strategies. Endowments, pension funds, and other institutions invest in a fund of fund strategy and alternative asset programs to diversify away from public stocks and bonds. Low correlation to public stock markets makes this strategy one of the 7 most popular alternative investments.
Start-up investing or ‘Angel’ investing is known as individuals or companies who provide capital for a business in the start-up phase. This capital is used for support to the company while in the beginning stages where the risk of failure is high; therefore, investing in start-ups can be full of volatility and also high returns if the business prospers. The investment is usually exchanged for ownership equity in the newly formed company.
In the last decade, there has been over $1.7 trillion invested in infrastructure. The increase in funding infrastructure has included the desire of investors seeking long term, stable returns. Investment in infrastructure has historically been less volatile than public stock markets.
Private companies invest in public infrastructure, which can benefit both the company and country or locale receiving the infrastructure. Companies and individuals experience defensive attributes to this form of investment while receiving dividends and cash returns.
Beyond these 7 most popular alternative investments, numerous others warrant consideration. Each year investors and companies are finding new ways to invest as they attempt to offer lower risk and steady returns in an ever-changing and dynamic world.