Types of Alternative Investments
Types of Alternative Investments
Looking to diversify your portfolio? You may want to consider some non-traditional investment opportunities, like the alternative investments examples we’ll look at today. Read on, as we’re discussing what some risk-inclined investors say are the 6 best alternative investments available.
What Are Alternative Investments?
According to Investopedia, alternative investments are any type of investment that’s not a stock, bond or cash. The types of alternative investments you may want to consider are extensive. Alternative investments include everything from first trust deeds to collectibles to cryptocurrencies and many other things.
Pros & Cons of Alternative Investments
Alternative investments examples are worth considering due to their unique characteristics. Including them in your investment portfolio might be smart as their benefits include
- Non-correlation with the stock market
- The possibility of outsized returns
- Added diversification
But when it comes to investing, nothing is without risk. One of the main drawbacks of alternative investments can be the illiquid nature of many of them, and there are others to consider as well. It’s important to assess the pros and cons of any new investment before you take the plunge.
Pros of alternative investments can be:
- Some may be resistant to stock market volatility
- Can offer diversification opportunities for your overall portfolio
- May hold value despite inflation
Cons of alternative investments can be:
- Can be difficult to sell
- It may be trendy, with potential for popularity to fade
- Typically less regulated and may be prone to scams or fraud
Examples of Alternative Investments
Examples of some of the more out-of-the-box alternative investments are complex derivatives, rare earth metals, cryptocurrencies and other digital assets like non-fungible tokens (NFTs).
While this list of alternative investments is not exhaustive, it does give an idea of some of the more common alternative investments opportunities that are possible.
6 Best Alternative Investments
Alternative investments do not have to be new or outlandish. Some of them, such as alternative real estate investments, have actually been used by investors as a wealth-building tool for decades.
Here are the six best alternative investments, including real estate alternative investment options that have become increasingly popular throughout the years.
1. Private Equity
Private equity is an investment made directly in a private (non-publicly traded) company. An investor can invest in a private company or a private equity fund. A private equity fund makes investments on behalf of a group of investors. The fund manager earns management and performance fees.
2. Venture Capital
Venture capital invests in startup companies, usually before they’re earning revenue of any significance. The goal of a venture capital fund is to invest in the early stages of companies. The goal is that they will grow significantly and one day become publicly traded companies through an initial public offering (IPO). This strategy may provide significant returns depending on the startup companies chosen.
3. Private Debt
Private debt is any debt held by or loaned to individuals, households, non-profits, private companies or publicly traded companies. Private debt is distinct from public debt, which is the debt owed by governments.
4. Hedge Funds
A hedge fund uses high-risk investment techniques such as borrowing money and investing with extreme leverage to earn substantial returns for a limited partnership of investors.
Commodities are raw materials and foods that trade on the commodity exchanges. A commodity is a basic type of commercial good that’s interchangeable with another similar variety. Examples of commodities are metals, lumber, beef, grains, oil and natural gas.
6. Real Estate
Investing in real estate is a very old tradition and the source of wealth for many. Alternative real estate investments offer many opportunities for wealth-building, such as buying, fixing and flipping (selling) single-family homes, owning and leasing commercial property and more.
Indirect real estate investing involves investing in a real estate investment trust (REIT) that may be a private or publicly traded company. A REIT is a special purpose investment vehicle that invests in property on behalf of its owners. It must distribute 90% of its earnings as a dividend to its beneficiary owners at the end of each fiscal year.
Alternative Investment Regulations
Many alternative investments are unregulated or at the minimum, just very mildly regulated. That is part of their appeal to some investors. Nevertheless, it also makes them have a higher risk profile.
For example, evaluate the risks of investing in a publicly-traded stock through a stockbroker. If the stockbroker goes bankrupt, the investment accounts have protection under an insurance program called SDIC. The SDIC insurance works similarly to FDIC insurance that protects the account holders at banks.
However, if you invest in cryptocurrency via a cryptocurrency exchange, there is no SDIC (or FDIC) insurance coverage for your trading account. If the cryptocurrency exchange goes bankrupt, you may lose it all.
The Securities Exchange Commission (SEC) and the Financial Services Regulatory Commission do not regulate alternative investments if they’re exempt. When considering alternative investments, investors should exercise caution and conduct due diligence with the help of financial professionals and possibly a qualified attorney.
The above list of alternative investments is by no means comprehensive, but it’s a good example of what you can consider if you’re thinking about diversifying your portfolio and investing in some new opportunities. Alternative investments can give investors more tools to grow their portfolios.
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