As investors look to diversify their portfolios and possibly increase returns, alternative investments have grown in popularity in recent years. While stocks and bonds have long been the preferred choice for many investors, alternative investments present a fresh range of possibilities and potential advantages. The world of alternative investments can be confusing and overwhelming, with everything from commodities to real estate to private equity and hedge funds.
But don't worry; in this blog, we'll give you an overview of alternative investments, explain how they operate, outline their risks and rewards, and explain why they might be a good addition to your investment portfolio if you're a US investor. So unwind and let's explore the intriguing world of alternative investments!
What are Alternative Investments and Why Consider Them?
Alternative investments have grown in popularity as a means of portfolio diversification and potential return-boosting for investors.
“The market for alternative investments was valued at $10.7 trillion globally in 2018 and is expected to reach $14 trillion by 2023 ~ McKinsey survey.”
So what are alternative investments? These non-traditional investment opportunities give investors a variety of choices outside of conventional investments like stocks, bonds, and cash. The following are some examples of alternative investments: art, commodities, real estate, private equity, hedge funds, and real estate.
Diversifying portfolios is one of the main reasons investors think about alternative investments. Bonds and stocks, two common types of investments, frequently move in tandem with changes in the market because they are correlated. On the other hand, alternative investments frequently have a low or negative correlation with traditional investments, which means they can aid in lowering the overall risk of a portfolio.
For instance, a study by BlackRock found that over 20 years, increasing the allocation of alternative investments from 10% to a portfolio of stocks and bonds increased the portfolio's risk-adjusted returns by an average of 1.4% annually.
Alternative investments may provide special investment opportunities that are not available through conventional investments, which is another reason why investors take them into account. For instance, investing in a private equity fund gives investors access to a privately held, non-traded company. This can provide a unique opportunity for investors to potentially earn high returns through a long-term investment strategy.
Beyond conventional investments like stocks, bonds, and cash, alternative investments include a wide range of investment opportunities. Based on the underlying asset classes, organizational structures, and operational strategies of these investment options, various types can be further subdivided into them.
Types of Alternative Investments: A Brief Overview and Examples
Commercial Real Estate Alternative Investments
Commercial real estate alternative investments are one type of alternative investment that has gained popularity recently. Investors have the option to invest in commercial real estate such as office buildings, retail establishments, and industrial properties through these types of investments. Alternative investments in commercial real estate can be set up in several different ways, including direct investments, private real estate funds, and real estate investment trusts (REITs).
Private Real Estate Syndicates
Another type of alternative investment in commercial real estate is private real estate syndicates, which pool money from various investors to buy and manage a variety of properties. These funds are frequently run by seasoned real estate experts who have access to a wider variety of investment opportunities and can use their knowledge to increase returns for investors.
Publicly traded businesses called real estate investment trusts (REITs) own and manage properties with income potential. Without having to directly own or manage the properties, investing in a REIT gives investors access to a diverse portfolio of commercial real estate assets. REITs can provide attractive dividend yields and potential capital gains, but they also carry risks due to changes in the real estate market and changes in interest rates.
Private equity, hedge funds, commodities, and art are a few additional categories of alternative investments. Hedge funds use sophisticated investment strategies to produce returns that are not correlated with traditional investments, whereas private equity entails investing in private companies that are not publicly traded. Commodity investments provide exposure to commodities such as gold, oil, and agriculture, while art investments involve investing in works of art for potential appreciation in value.
Factors to Consider When Investing in Alternatives
Your investment portfolio can benefit greatly from diversification, and alternative investments may even boost returns. However, there are several things to think about before making an alternative investment.
Investment Goals and Risk Tolerance
Your investment objectives and risk tolerance are the first things to take into account when investing in alternatives. Different alternative investments have varying levels of risk and potential returns, and it is critical to match your investment objectives with the risk profile of the investment. For example, if capital preservation is your primary goal, investing in high-risk alternatives such as hedge funds may not be appropriate.
Another important factor to consider when investing in alternatives is liquidity. Alternative investments, unlike traditional investments, are frequently less liquid, which means they can be difficult to sell quickly. Certain alternative investments have specific holding periods or lock-up periods that may restrict your ability to sell or withdraw your investment. Before investing in an alternative investment, it is critical to understand the liquidity terms.
Fees are another important factor to consider when investing in alternatives. Fees for alternative investments are typically higher than for traditional investments, reflecting the higher risk and specialized expertise required to manage them. When evaluating an alternative investment, it's critical to understand the fee structure, which includes management fees, performance fees, and other costs.
The investment platform you select to invest in alternatives is also an important consideration. New-age alternative investment platforms, such as Assetmonk, provide an easy-to-use online platform for investors to invest in commercial real estate properties. Assetmonk provides investors with a diversified portfolio of properties across different geographies and asset classes, making it easy to create a well-rounded investment portfolio.
- Alternative investments allow investors to diversify their portfolios while potentially increasing returns over traditional investments such as stocks and bonds.
- Alternative investments have little or no correlation with traditional investments, which can help to reduce overall portfolio risk.
- Alternative investments offer unique investment opportunities that are not available through traditional investments, such as investing in a privately held company.
- Commercial real estate alternative investments have grown in popularity in recent years, with examples including direct investments, private real estate syndicates, and real estate investment trusts (REITs).
- When investing in alternatives, factors to consider include investment objectives and risk tolerance, liquidity, fees, and the investment platform.
Alternative investments can be a valuable addition to an investor's portfolio, offering diversification and the potential for higher returns. Investors, on the other hand, must understand the risks and potential rewards of each type of alternative investment and evaluate them in light of their investment objectives and risk tolerance. Before investing in alternative assets, it is also critical to consider factors such as liquidity, fees, and the investment platform.
Assetmonk is a new-age alternative investment platform that offers commercial real estate investment opportunities to investors. Assetmonk provides an easy-to-use online platform for investors to invest in diverse portfolios of commercial real estate properties.
Systematic Risk: What Investors Need to Know
What is Portfolio Income?
Q1.What are alternative investments?
A.Alternative investments are non-traditional investment opportunities that provide investors with options other than stocks, bonds, and cash. Real estate, private equity, hedge funds, commodities, and art are some examples of alternative investments.
Q2.Why should investors consider alternative investments?
A.One of the main reasons investors consider alternative investments is to diversify their portfolios. Alternative investments often have a low or negative correlation with traditional investments, which means they can help reduce overall portfolio risk. Furthermore, alternative investments may provide unique investment opportunities that traditional investments do not.
Q3.What are some examples of commercial real estate alternative investments?
A.Alternative commercial real estate investments allow investors to invest in commercial properties such as office buildings, retail spaces, and industrial properties. Alternative investments in commercial real estate can be structured in a variety of ways, including direct investments, private real estate funds, and real estate investment trusts (REITs).
Q4.What factors should investors consider when investing in alternatives?
A.Investors should consider their investment goals and risk tolerance, liquidity, fees, and the investment platform they choose before investing in alternative investments. It is critical to align investment goals with the risk profile of the investment, understand liquidity terms, fully comprehend the fee structure, and choose the appropriate investment platform.
Q5.How can alternative investments benefit investors?
A.Investors can benefit from alternative investments by diversifying their portfolios, potentially increasing returns, providing unique investment opportunities, and lowering overall portfolio risk. Furthermore, some alternative investments may provide attractive dividend yields as well as potential capital appreciation.