Alternative investments are those that fall outside of the traditional set of investment asset classes, which include stocks, bonds, and cash. Unlike traditional asset classes, most alternative investments do not trade on stock exchanges. This is because they lack many of the regulations found with stocks and bonds.
Exchanges provide a readily deep pool of buyers and sellers, which make liquidity available. Transacting off-exchange means giving up access to that liquidity, making most alternative investments illiquid assets.
List of Alternative Investments
Alternative investments are made up of a set of investments you’ve likely already heard of. They include:
Of those listed above, collectibles can be the most difficult for accurate price discovery. In some cases, there isn’t a readily available market, which can leave some investors with a significant loss when it's time to sell their investment.
Unlike the other investments on the list, some commodities can be traded in public exchanges. These are commodities wrapped within securities such as gold, silver, oil, agriculture products, and more. Commodities such as gold bullion (gold bars) and raw silver are still bought and sold off of exchanges.
Some Alternative Investments Are Illiquid
Many alternative investments lack liquidity because there isn’t a public exchange to transact (i.e., buy/sell). Buyers and sellers often meet through word of mouth, or they may even see an ad by a firm pitching an alternative investment. These deals take longer and have a higher transaction cost than publicly traded securities. Such is the nature of private deals.
When investing in alternative investments, be prepared for a more involved transaction with higher fees and longer holding times than publicly traded securities.
It’s also important to work with someone experienced in the specific type of investment you’re considering. You want the best price discovery possible. Because the investment is private, pricing information can be difficult to come by. That doesn’t mean it isn’t available and that a good deal can’t be made.
Who Should Consider Alternative Investments?
Some alternative investments, such as private equity and hedge fund investments, are restricted to accredited investors. This is because these alternative investments can be complex and should only be sold to experienced investors that are able to sustain a large loss.
Institutional investors, such as endowments and pension funds, are also involved in alternative investments.
The reason individuals and institutions get involved with alternative investments is for their potential to produce attractive, risk-adjusted returns. Because these are more sophisticated investors, they can handle locking up some of their capital for several years without it affecting them much.
Alternative investments within the same asset class may be set up differently. This is why working with a financial professional who can guide you along in the process of purchasing alternative investments should be part of your plan.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
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