9 Types of Alternative Investments
You’ve likely heard about the need to diversify your portfolio. But have you ever considered that you might be able to do so by investing in wine? How about vintage cars? Or baseball cards?
An alternative investment is defined as an investment in any asset class excluding capital stocks, bonds, and cash.
While in the past alternative investing was generally only for institutional or high net worth individuals, alternative investing has become feasible to retail investors via alternative funds. However, based on an individual’s objectives and risk tolerance, their unique characteristics may not be suitable for all investors. In this article, we’ll explore more about 9 types of alternative investments, including:
- Real Estate
- Private Equity & Venture Capital
- Fine Art & Collectibles
- Commodities
- Digital Assets
- Hedge Funds
- Managed Futures
- Derivative Contracts & Structured Products
- Peer-to-Peer Lending
Real Estate
There are many ways to invest in real estate, which is the world’s biggest asset class. This includes investing in physical property or properties, property-based securities, real estate investment trusts (REITs), real estate mutual funds, and real estate crowdfunding platforms.
Private Equity & Venture Capital
Private equity is categorized as a capital investment made into a private company (a company not listed on a public stock exchange). Venture capital is one subset of this type of alternative investment, which focuses on startup companies and early stage investing. Growth capital can help more mature companies restructure or expand. Buyouts can also be a subset, where a company is purchased outright.
Fine Art & Collectibles
Though it may be perceived as a hobby, investing in rare wines, vintage cars, coins, old toys, stamps, sports cards, and entertainment memorabilia is considered alternative investing. Investments in collectibles are made in hopes that the value of the physical item will appreciate over time as the related party (artist, athlete, movie star) becomes more historic. Collectibles are generally thought of as a high risk asset class, as improper care can lead to potential destruction of the physical asset. Collectibles are also considered rather illiquid, as they can be difficult to sell.
Commodities
Commodities are tangible assets such as agricultural products, oil, natural gas, and precious and industrial metals. Owning these natural resources has long been considered a hedge against inflation, as they’re not sensitive to public equity markets. The value of commodities rises and falls in line with supply and demand. Higher demand leads to investor profits.
Digital Assets
Digital asset investing is recognized as an alternative investment since it is outside of the traditional scope of stocks and bonds. Digital asset investing has the potential to provide capital appreciation and/or passive income due to staking rewards.
To learn more about how trading psychology has the potential to impact digital asset investing, please check out our recent blog, “10 Behavioral Finance Biases in Cryptocurrency.”
Hedge Funds
In its most basic form, a hedge fund is a way for accredited investors (generally high net worth individuals) to pool their money together to try to beat average market returns. Hedge fund managers use complex trading and risk management techniques to try to maximize these returns.
Managed Futures
A futures contract is a legal agreement to buy or sell a particular commodity, asset, or security at a predetermined price at a specified time in the future. Managed futures consist of a portfolio of futures contracts that are actively managed by professionals.
Derivative Contracts & Structured Products
Derivative contracts involve the trading of an underlying asset, such as commodities, stocks, bonds, or currencies, without owning them directly. Investing in derivatives is not for beginner or even intermediate investors, and should be managed by a professional to help minimize risk.
Structured products generally involve fixed income markets, or those that pay investors dividends (i.e. government or corporate bonds). Examples of structured products include credit default swaps (CDS) and collateralized debt obligations (CDO).
Peer-to-Peer Lending
Peer-to-peer (P2P) lending involves loaning money to individuals or businesses through online platforms that are able to connect borrowers with investors.This type of lending cuts out the financial institution as the middleman, and is also known as “social lending” or “crowd lending.” This type of alternative investment has only been around since 2005.
Potential Pros & Cons of Alternative Investing
As with any investment, there are many potential pros and cons. Diversification, the potential for higher returns than traditional investments, and potential protection against inflation are often cited as the biggest pros.
The biggest cons are often recognized as higher fees and transaction costs, potential for higher risk than traditional investments, reduced regulation, and the fact that some types of alternative investments are less liquid (meaning they’re more difficult to sell in a hurry).
Being they represent an entirely different asset class than stocks and bonds, alternative investments have many different tax rules. Understanding these tax implications is a key piece of alternative investing.
Thinking Beyond Stocks & Bonds = Potential To Take Your Portfolio To New Heights
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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.
This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.