Alternative investments provide a unique risk-return profile and access to specialized markets. They also tend to have low correlations with traditional asset classes, making them ideal for diversification.
Historically, many types of alternative assets have been available only to financially sophisticated investors like institutions or high-net-worth individuals who are accredited by the Securities and Exchange Commission (SEC). These individuals may qualify based on their income or net worth.
Real estate
In an environment where it’s hard to find high yields in stocks and bonds, many investors are looking for alternative opportunities. One of the most popular options is real estate, which can offer both higher returns and more stability.
There are several ways to invest in real estate, including buying your own home and renting it out. There are also nontraditional real estate investments, such as private funds and crowdfunding platforms. These investments can be a good way to diversify your portfolio and avoid the risk of losing money when stocks decline.
Adding real estate to your portfolio is a great way to earn recurring income, as rent payments can provide consistent payouts that are similar to bond yields. However, it’s important to understand the risks and rewards of this type of investment.
Private equity
Private equity has the potential to boost returns and diversify a portfolio. Private markets offer access to a larger pool of opportunities than public ones, which can be overcrowded by a small number of large firms. Private equity firms can also benefit from lower valuations and more flexible financing.
Private equity is increasingly popular among pension funds, sovereign wealth funds (SWFs) and endowments, which seek returns that exceed those of public markets. Investing in this asset class can be tricky, though. Because private equity investments require capital calls from limited partners, they can take years to complete, and they’re illiquid. Moreover, estimates of risk and correlation with public markets are highly variable. This makes it difficult to construct an accurate benchmark.
Commodities
Investing in alternative assets can help diversify your portfolio, but it is important to understand the risks and opportunities. These investments typically have lower liquidity, greater volatility, and less transparency than traditional stocks and bonds. They also have a higher cost structure.
For example, if you invest in a P2P lender or venture capital fund, your money could be at risk if the borrower fails to pay back the loan. Likewise, investing in commodities involves the risk of losing money due to supply and demand imbalances.
Moreover, these types of investments are typically exposed to a wide range of macroeconomic and geopolitical factors that may cause them to perform differently from stocks and bonds. Thus, it is best to keep them in a small proportion of your portfolio.
Hedge funds
The opportunities for alternative investments are plentiful, but they also come with substantial risks. Investors should consider these risks and their own goals when making a decision to invest in hedge funds.
Hedge funds are investment companies that use complex trading techniques to generate returns from pooled investment assets. They are less regulated than mutual funds and can take on more risky strategies like shorting stocks, trading options and betting on foreign currencies and commodities.
They typically limit participation to accredited investors who have liquid net worth of $1 million or more and earn an annual income of at least $200,000. In some cases, these funds may be highly concentrated in a single sector. They are also illiquid and require a long commitment of time before an investor can pull out their money.
Exchange-traded funds (ETFs)
Investing in alternative assets can be an excellent addition to a well-diversified portfolio. However, these investments often carry higher risk than more diversified securities. They also may be illiquid, making them difficult to sell. Furthermore, some alternative investments require a high level of expertise and capital. This makes them unsuitable for most average investors.
Investors often think of stocks, bonds, and mutual funds when they think about investing. But there are many other ways to put your money to work, including real estate, private equity, precious metals, cryptocurrencies, and peer-to-peer lending. Many of these investments are available to the average retail investor through ETFs, crypto exchanges, and commodity markets. Others are limited to “accredited” investors, whose earned income and net worth exceed certain thresholds.