An alternative investment is one that does not fit into the conventional investment categories of stocks, bonds, and cash. Alternative investments can range from familiar assets like real estate and commodities, to niche assets like collectibles and memorabilia.
Compared with traditional investments, alternative assets are generally illiquid, meaning they cannot be easily or quickly converted to cash without a significant loss in value. It is much easier, for instance, to sell 100 shares in Tesla or Microsoft (traditional stock investments) when liquidity is needed, than a 500-year-old rare gold coin purchased at an auction.
Investors turn to alternative investments to diversify their portfolio and spread risk across a wider range of opportunities. Alternative assets can fortify a well-rounded investment strategy and generate potentially higher returns (and in turn, higher risk).
Examples of alternative investments
Alternative investments span a much wider range than traditional investments, catering to many different needs and interests.
Real Estate
An investment strategy familiar to all levels of investor, real estate involves buying property or property-based securities to later sell at a higher price. Property or land owners may also rent out their assets on a continuous basis to generate a steady stream of passive income. Investing in real estate requires substantial upfront capital, but it’s one of the most reliable and stable methods of diversifying a portfolio.
Private Equity and Venture Capital
Private equity refers to investing in companies that are not listed on a public stock exchange. Venture capital is a common type of private equity investing. This involves investing money in an early-stage business in exchange for a stake in the company (i.e. equity). If the company is successful, the investor can exit by selling their stake during an IPO or high-value acquisition.
Private equity and venture capital are risky alternative investments that require a long-term commitment, but they also offer the potential for substantial returns.
Commodities
Commodity trading is one of the oldest forms of trading, and it remains one of the most widely used alternative investment strategies. Commodities are physical materials that have essential applications in the real-world, like gold, oil, and wheat. Investors turn to commodities to protect themselves from inflation as they tend to hold value well throughout economic downturns (particularly gold, which is considered a store of value).
Cryptocurrencies
One of the newest asset classes, cryptocurrencies are digital assets that are based on blockchain technology. Bitcoin is the most popular, followed by Ethereum. Different cryptocurrencies have different purposes. Bitcoin was designed to be a decentralised, peer-to-peer unit of exchange, while Ethereum was designed to facilitate smart contracts. Cryptocurrencies are very volatile and are largely unregulated in many countries. Some investors profit from price appreciation, while others stake their cryptocurrencies to generate passive income.
Art and Antiques
Investing in art and antiques involves buying valuable items like paintings and collectibles with the expectation that their worth will increase over time. It’s one of the most illiquid and subjective alternative investment strategies, but if you have patience and the right expertise, it can be highly profitable. The art market doesn’t follow typical market trends – it’s influenced by a range of factors such as historical significance, condition, rarity, public perception, and so on. It’s a suitable choice for investors who can lock up capital for years without needing an immediate return.
These are just a few of the alternative investment strategies available to investors looking to creatively diversify their portfolio. Other methods include private debt, farmland, litigation funding, peer-to-peer lending, and hedge funds.
Alternative Investments vs Traditional Investments
There are some key differences between traditional and alternative investments, namely relating to liquidity, market access and regulations.
Feature | Traditional Investments | Alternative Investments |
Examples | Stocks, bonds, cash | Art, real estate, cryptocurrencies, private equity, commodities, hedge funds |
Market Access | Generally open to all investors. Low capital entry requirement | Often restricted to institutional or accredited investors, and specialist advice is usually required. High capital entry requirement |
Liquidity | High liquidity (easy to sell) | Low liquidity (harder to sell) |
Regulation | Highly regulated | Less regulated, depending on the asset |
Investment Period | Short-term or flexible to investor’s needs | Generally long-term |
Return Potential | Steady, but more stable with lower returns | Higher returns, but with higher risk |
What are the benefits of alternative investments?
Why invest in alternative investments? There are many advantages, including:
- Diversification. Alternative investments are incredibly broad and do not follow typical stock prices. This helps spread risk and increase opportunity while stabilising returns over time.
- Inflation hedge. Many alternative assets have real-world uses, such as oil, gold, and real estate. These tend to be strong inflation hedges as their value can increase as the cost of living rises.
- Unique opportunities. Unlike traditional investments, alternative investing provides opportunities to invest in passion projects as well as innovative technologies, whether it’s an exciting new company or a rare piece of art.
- Higher returns. While alternative investments are risky, the returns can outpace traditional market profits by a large margin, particularly in private equity and venture capital.
How to invest in alternative investments
Alternative investments are broad and every asset class has its own process. Buying land is different to buying Bitcoin, and buying equity is largely different from purchasing art. In most cases though, investing in alternative investments requires specialist knowledge. Alternative assets are often illiquid and complex with high capital requirements, so an advisor is essential for helping you navigate the market in a way that fulfils your needs while managing risk.
If you are interested in investing in alternative investments and would like a private consultation, please contact us to schedule a call. You can also view a range of exclusive alternative investment opportunities with The Matt Haycox Group.