In 2022, headlines and articles noted that alternative investments are becoming more acceptable as portfolio diversifiers and financial strategies. An article published by Nasdaq explained that total alternative investments under management are projected to reach $17.2 trillion. Meanwhile, a blog published on the Chartered Alternative Investment Analyst (CAIA) website said that “alternatives are expected to produce half of industry revenue in a few years,” even as these investments represent only 12% of the overall global investments market.
Many of these articles give the impression that alt investments are relatively new. In reality, alternative investments have been around for centuries, if not millennia. Examples of commodity trading date back to 4500 B.C.E.
So, what are they? When we talk about alternative investments in the 21st century, we’re referring to any investment that isn’t a traditional one like stocks, bonds, cash, or cash alternatives. When it comes to determining four major categories of alternative investments, the response isn’t necessarily in stone. There are many alt investment categories. But for the purposes of this blog, the four categories discussed are collectibles, commodities, private equity/private debt funds, and real estate.
Collectibles
Collectibles is a catch-all category for any product bought in hopes it will increase in value. Examples of investment collectibles include coins, stamps, wine, and art. Fine jewelry can also be considered a collectible.
The issue with collectibles is that they can be long-term investments, meaning the hold periods can last decades to see any increase in value. Additionally, investors need a certain amount of knowledge to find collectibles that will increase in value. This requires a healthy interest in numismatics (coin collecting) or wine collecting.
Commodities
Commodities are raw materials or similar goods used to manufacture other goods. They can include agriculture products (corn, wheat, or cattle), energy products (oil or natural gas), and metals (gold, silver or aluminum).
As mentioned above, commodities have been traded for thousands of years. These days, investors can invest in commodity futures indices, mutual funds, or exchange-traded funds.
While commodities are generally not correlated to the stock market, they can provide portfolio diversity. However, they are highly volatile investments because they’re influenced by so many global, economic, and socio-political factors.
Private Equity/Private Debt
Private equity and private debt concern investments traded outside of public stock markets. Private equity allows investors put their capital into private companies or funds in return for ownership stakes.
Private debt, sometimes called private credit or direct lending, raises capital from investors, which is pooled in funds, then lent to borrowers.
In some cases, private equity or private debt can offer higher yield than more traditional investments. On the other hand, these investments are highly illiquid and long term. Additionally, they’re not registered with the Securities and Exchange Commission. As such, these firms and funds don’t have to disclose information to investors.
Real Estate
Real estate is another very broad investment category. There is direct real estate ownership (in which the investor takes physical ownership of the actual asset). Then there is passive ownership, which can involve investing in a real estate fund or fractional shares of a Delaware Statutory Trust (DST). In these cases, the fund or DST pools investor money, then buys and manages real estate assets.
One benefit of real estate ownership is that in many cases, it’s non-correlated to market movements. But it’s a highly illiquid asset, and in the case of DSTs, there are few, if any, secondary markets on which to sell shares if the investor wants out.
The above represents four types of alternative assets. Also in this investment subset are:
Hedge funds: These pool money from investors, which is then directed to investment types to obtain positive returns.
Derivatives: Contracts or investments that get their value from an underlying asset, asset group, or indices.
While alternative assets can help balance portfolios, it’s important to understand the benefits and downsides before investing in them. Always check with a qualified professional before moving ahead on these investments.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investments practices that may increase risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. The performance of alternative investments can be volatile. There is often no secondary market for an investor’s interest in alternative investments and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-US exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in the US markets. Additionally, alternative investments often entail commodity trading which can involve substantial risk of loss.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Cash flow or income are not guaranteed.
DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
