An alternative investment can be defined as an asset that differs from the traditional, more commonly known investments, which is mainly comprised of publicly traded stocks, bonds and cash. Meanwhile, some examples of alternative investments include, but are not limited to, private equity, real assets (such as real estate and oil) and emotional assets (for example stamps and cars).
Why invest in Alternative Investments?
The main reason as to why alternative investments are appealing to potential investors is due to the diversification benefits they offer to one’s investment portfolio. Given this factor, the investor will realise higher overall gains as a result of lower risk inherent in the portfolio. Additionally, alternative investments tend to be negatively correlated with traditional investments, leading to a higher degree of volatility mitigation.
How can one invest in Alternative Investments?
Although traditionally alternative investments were more available to institutional and high net worth investors, they are becoming more accessible to retail investors as time goes on. The most common way for individuals to invest in such assets is to either directly buy the physical asset or to invest in funds that are investing in the assets themselves, resulting in indirect ownership.
An example of direct investing is to buy a block of apartments, while indirect investing occurs when one buys shares of a real estate investment trust (REIT).
That being said, alternative investments are not suitable for all retail investors. This is because of a number of characteristics, namely illiquidity, lack of transparency and regulation in place, as well as their complex nature and leverage that may be employed.