Alternative investments are assets outside of the traditional stocks, bonds, and cash categories. With interest rates low and stock market volatility high, alternative investments can provide portfolio diversification and potentially higher returns. This article explores alternative investments to consider, including real estate, commodities, hedge funds, private equity, and more.

What Are Alternative Investments?

Alternative investments are assets that fall outside the conventional categories of stocks, bonds, and cash. They offer investors greater diversification beyond traditional securities. Common alternative investments include real estate, commodities, hedge funds, private equity, venture capital, and more. With stocks and bonds delivering lackluster returns, investors are increasingly considering alternative investments to achieve their financial goals.

Key Take Aways

1. Alternative investments like real estate, commodities, hedge funds, and private equity can provide greater portfolio diversification compared to just stocks and bonds. This can reduce overall volatility.
2. Many alternatives have the potential to generate higher returns over the long run than publicly traded stocks and bonds. However, they also come with higher fees, risks, and illiquidity.
3. Alternatives tend to have low correlation to traditional securities like stocks and bonds. This means they can zig when stocks zag, improving a portfolio’s resilience.
4. Real assets that have intrinsic value like real estate, precious metals, oil, and inflation-linked bonds can provide effective inflation hedging capabilities.
5. Accredited and qualified purchaser investors are best positioned to prudently allocate to individual alternative investments due to minimum wealth and sophistication requirements. Others can access alternatives through diversified liquid mutual funds and ETFs.

Types of Alternative Investments to Consider

Here are some of the most popular alternative investment options to consider:

Real Estate

Real estate investments like rental properties, REITs, and real estate funds can provide portfolio diversification, inflation hedging, tax advantages, and cash flow. With low interest rates, real estate has benefited in recent years.

Commodities

Commodities like precious metals, oil, grains, and livestock offer inflation protection since they have intrinsic value. They don’t correlate directly with stocks and bonds either. Gold and silver, in particular, are popular commodities to hedge against inflation and financial turmoil.

Hedge Funds

Hedge funds are actively managed alternative investment funds that can pursue complex strategies beyond long-only stocks and bonds. They utilize leverage, derivatives, and short selling to generate higher absolute returns in any market environment. Hedge funds cater to accredited and institutional investors.

Private Equity

Private equity firms invest in private companies not listed on public exchanges. They provide start-up and growth capital in exchange for a stake in the companies. Private equity can generate outsized returns compared to public markets but carries more risk and illiquidity as well. Venture capital funds are a subset of private equity.

Managed Futures

Managed futures involve systematic trading in futures contracts in areas like commodities, currencies, and bonds by professional money managers. Like hedge funds, managed futures funds can profit in up or down markets, providing uncorrelated returns to mainstream assets.

The Risks and Rewards of Alternative Investments

While alternatives can boost portfolio returns, they carry significant risks as well:

• Illiquidity – Many alternatives like real estate and private equity have lock-up periods hampering early withdrawals.
• Higher fees – Hedge funds and private equity charge hefty fees for access, including a percentage of profits.
• Higher risk – Alternatives tend to be riskier than conventional securities, with a greater chance of losing your entire investment.

However, the risks of alternatives can be worth the potential rewards:

• Greater diversification – Alternatives exhibit low correlation to mainstream assets, reducing overall portfolio volatility.
• Higher returns – Hedge funds, private equity, venture capital, and real estate can generate superior risk-adjusted returns over the long term.
• Inflation hedging – Real assets like real estate, commodities, and inflation-linked bonds can preserve purchasing power when inflation rises.

Who Should Invest in Alternative Investments?

Accredited investors and qualified purchasers are ideal candidates for including alternative investments as part of a balanced portfolio allocation. These investors must meet SEC requirements for minimum income, net worth, and sophistication before accessing complex alternative strategies. For everyone else, REITs and diversified alternatives mutual funds or ETFs can provide exposure to alternative assets in more accessible structures.

Conclusion

With mediocre projected returns for stocks and bonds, investors should evaluate adding alternative investments for greater diversification. However, individual alternatives often involve substantial fees, illiquidity, complexity, and risk of loss. Therefore, accredited and qualified investors may consider professionally managed multi-strategy alternative mutual funds or ETFs. This conveniently allows a prudent allocation to several alternative strategies in a daily liquidity vehicle. In a precarious world, alternatives deserve consideration to enhance portfolio resilience.

Alternative Investments to Consider – FAQs

What are the most common alternative investments?

Some of the most common alternatives include real estate, commodities like gold and oil, hedge funds, private equity, venture capital funds, managed futures, and more.

What are the main benefits of alternative investments?

Alternatives offer portfolio diversification, lower correlation to mainstream assets, higher return potential, and inflation hedging capabilities.

What are the primary risks with alternatives?

The biggest risks are higher fees, complexity, illiquidity with multi-year lockups, lack of transparency, and higher chances of losing your full investment.

Who should invest in alternative investments?

Accredited investors and qualified purchasers meeting SEC wealth and sophistication requirements are best suited for allocating to alternative investments.

What is the best way to gain exposure to alternatives?

For non-accredited investors, REITs and diversified alternative strategy mutual funds or ETFs offer the most convenient way to prudently invest in alternatives.

You May Also Like: