Alternative investments have always enjoyed their fair share of popularity, especially among high-net-worth individuals. But despite being on investors’ radars for decades, they never strayed too far from the outskirts of the investment landscape. If the wealthy had no problem putting their money into alternative assets, average investors were less inclined to do so, which kept exposure to these types of investments to a minimum. That seems to have changed in recent years as the demand for alternative investments has grown considerably and continues to increase at a high rate. According to statistics, the global market for alternative investments is projected to surpass $23 trillion by 2026 as more retail and individual investors are taking the plunge.
One of the reasons for this shift is the emergence of new investment venues. For example, 15 years ago, the cryptocurrency sector didn’t even exist, and yet today anyone can buy Bitcoin online or choose any other crypto and add it to their portfolio. Another contributing factor is the higher life expectancy at a global level. People today are living longer, and apparently, that makes them more open to taking risks in order to secure bigger returns. Rising inflation, the probability of a global recession and political uncertainty and unrest also play a role in the upsurge of alternative investments. Given the trend, it makes sense for astute individuals to keep an eye on alternative assets and take them into account when diversifying their portfolios.
What are alternative investments?
When people think of investing, traditional assets such as stocks, bonds and cash are the first things that come to mind. So, even though alternative investments are inching closer to the mainstream, a lot of people still don’t have a good understanding of what these assets are or what they entail. That’s why it’s necessary to start with the basics and provide clarification in this respect.
Alternative investments is a broad term that covers an ever-expanding range of assets, either tangible or intangible, that don’t fit into any of the conventional assets categories. Basically, any asset besides stocks, bonds and cash can be considered a form of alternative investment, from real estate and fine art to crypto, commodities and everything in between. There are many aspects that differentiate these two asset classes. To begin with, traditional assets are usually traded on public markets while alternative assets are traded via more exclusive channels. Also, due to their newness, high level of intricacy, regulatory uncertainty and increased risks, alternative assets are often held by institutional investors or high-net-worth individuals.
But probably the best way to emphasize these differences and illustrate the concept is to take a look at some of the most popular alternative investments at the moment.
Real estate investments come in all sorts of shapes and sizes, from residential and commercial real estate to raw land, real estate mutual funds or real estate trust investments (REITs). Real estate represents a very attractive investment for portfolio diversification, not only because of the wide variety of options it provides but also because it can ensure a steady income through rentals, tax breaks and equity as assets are generally expected to appreciate with time.
Commodities can also be included in the real assets subcategory, being basic physical goods that can be bought and sold such as cattle, grains, natural gas, oil, gold and so on. Although they are a form of alternative investment, people have been trading and investing in commodities for ages because they serve as a hedge against inflation and resist the influence of public equity markets. Their value is highly dependent on the supply-demand dynamic, which provides the opportunity for high returns.
The newest addition to the alternative investments scene, digital currencies have spent their first years of existence on the fringes of the financial system, but in recent years they have come to gain ground and popularity as a viable investment vehicle due to their high return potential and appreciation prospects. Since this is an extremely complex asset class that’s still in its developmental stages, volatility and risks are higher than with other types of investments, but that hasn’t stopped institutional and retail investors from taking a special interest in crypto over the past few years.
Sometimes, hobbies can turn into an investment venue. A lot of people who are passionate about collectibles are willing to invest considerable amounts of money into a wide variety of items they find valuable such as fine art, vintage cars, sports memorabilia and so on. These objects may have historical significance or may increase in value over time, making them a good long-term investment.
Venture capital is about putting money into up-and-coming companies that are posed for fast growth. It may take a few years to reap the rewards (usually between 3 to 7 years), but if these companies take off as expected, the wait and risk are well worth it.
The pros and the cons
As expected, investing in alternative assets comes with both pros and cons. If we focus on the positives, the fact that alternative investments have very little to do with traditional assets makes them a great option for portfolio diversification and overall risk reduction.
For those who are able to tolerate increased risk, alternative investments provide the potential for high rewards. Besides, the wide range of alternative assets available ensures flexibility and gives investors the possibility to choose the venue that fits their needs and requirements.
On the downside, since they’re not as widespread as conventional assets, alternative investments tend to come with higher fees. Also, their low liquidity can represent an obstacle for investors should they need cash urgently. In addition, their enhanced complexity and increased risk often become a deterrent for certain individuals who don’t want to put in the extra work to decipher them before making a decision.
Alternative investments represent a very intriguing and multifaceted topic that any self-respecting investor should know of, so if you’re thinking about building wealth, these assets are definitely worth your attention.