Alternative investments: Exploring the landscape

The traditional route of investment like mutual funds, stocks and bonds has been serving people for decades now. But, that’s only a part of the bigger picture and there exists a category beyond the realm of traditional investments known as alternative investments. 

What are alternative investments?

Alternative investments are financial assets that fall outside the traditional stocks, bonds and cash. Investors seeking diversification, higher returns and unique opportunities often explore this side of investment. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, derivatives contracts, real estate, and commodities. 

Some of the most common types of alternative investments are: 

1. Real Estate

• Residential & Commercial Properties: Investing in physical properties can provide both rental income and capital appreciation 
• Real Estate Investment Trusts (REITs): These are the companies that own, operate or finance income-producing real estate. They offer a way for people to invest in real estate without directly owning property

2. Private Equity 

• Venture Capital: Investing in companies at an early stage with high growth potential 
• Buyouts: Acquiring companies or buying a large stake in them. This is often done to restructure or improve their profitability before selling at a higher value 

3. Hedge Funds 

There are pooled investment funds that use various strategies to earn active returns for their investors, including long & short equity, market neutral and global macro

4. Commodities 

Commodities like oil, gold and agricultural products have been traded on worldwide markets for the longest time. The potentially higher returns on commodities have made them a hot pick for alternative investments. They include - 

• Precious Metals - Gold, Silver, Platinum 
• Agricultural Products - Wheat, Corn, Coffee
• Energy - Oil, Natural Gas

5. Collectibles 

Some investments are not just limited to purely financial reasons but are also done as a hobby. A sports fan would love to collect sports memorabilia or a film fan would love to collect a famous prop used in a blockbuster film. It was only two years back when a Mickey Mantle collectible baseball card was sold for a whopping $12.6 million. Collectibles are of deep interest to investors as they are finite in nature, often giving the investor a sense of exclusivity too. Collectibles include - 
 

• Art - Paintings, Sculptures, and more 
• Antiques - furniture, jewelry
• Stamps, coins, wine, movie posters and props, sports collectible cards, and more 

6. Cryptocurrencies 

Even within the wide range of alternative investment options available, cryptocurrency has become a popular choice of investment. Cryptocurrencies are digital or virtual currencies that use a decentralized system using cryptography. Bitcoin and Ethereum are two of the most prominent cryptocurrencies 

7. Infrastructure 

Investments in physical systems and services such as transportation, utilities, and telecommunications 

Why are alternatives implemented?

Wealthy individuals usually make alternative investments. JP Morgan’s global family office report shows that the rich have 46% of their investable assets in alternatives. A vast majority of investments are done in private equity & real estate. Here’s why alternative investments are important. 

1. Diversification

Alternative investments often have a low correlation with traditional assets like stocks and bonds, helping to reduce overall portfolio risk.

2. Potential for higher returns

Many alternative investments, particularly private equity and hedge funds aim to deliver higher returns than traditional investments.

3. Hedge against inflation

Real assets like real estate and commodities can provide a hedge against inflation, as their values typically rise with increasing prices.

4. Access to unique opportunities

Alternative investments offer access to markets and strategies not available through traditional investments, such as start-ups in private equity or rare collectibles.

5. Income generation

Investments like real estate and infrastructure can provide regular income streams through rents, tolls, or dividends.

What are the risks with alternative investments?

1. Liquidity

Many alternative investments are less liquid than traditional assets. Real estate, private equity, and collectibles can take time to sell without a significant loss in value.

2. Valuation difficulties

Valuing assets like real estate, art, or private companies can be challenging due to the lack of frequent transactions and transparent market prices.

3. Higher fees

Hedge funds and private equity funds often charge higher fees, including management fees and performance fees, which can erode returns.

4. Complexity and risk

Alternative investments often require a high level of expertise to manage effectively. They can be complex and carry higher risk, especially if leverage is used.

5. Regulatory and market risks:

Some alternative investments, like cryptocurrencies, are subject to regulatory uncertainties and market volatility.

Alternative investments offer a diverse range of opportunities beyond traditional stocks and bonds, from real estate and private equity to hedge funds and commodities. While they can provide diversification, potential for higher returns and unique investment opportunities, they also come with risks such as lower liquidity, higher fees, and valuation challenges. Careful consideration and professional guidance are essential to determine their suitability for individual investors.

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