Guide to Alternative Investments

Guide to Alternative Investments

Introduction

Thinking about trying out investing? You must be if you are here.

Many people are starting to think about investing, a 9 to 5 paycheck just doesn’t cut it anymore. So, more people are looking at adding to their wealth through investing. However, there is no one and only type of investing.

Usually, when we think of investing, we think about Wall Street, stocks and bonds, or cryptocurrencies.

But, there is another type, alternative investments. Now, this type of investing is not to everyone’s taste. Realistically, it is specific to those with a high net worth.

For the most basic description of what alternative investments are, they are simply investments that are not part of the stock market or bond market.

It’s still an investment, but it is not a traditional form of investing, thus, it’s called alternative investing.

Today, we will tell you all about alternative investments, what they are, if they’re suitable for you, and what is beneficial about them.

What Are Alternative Investments?

As previously mentioned, alternative investments are basically just investments that are not a part of the stock or bond trading markets. They provide investors with a form of investing that is outside of traditional markets of investing.

Traditional investing or accumulation of wealth would come from fixed income, cash, and stock markets. Alternative investments are an alternative to these ways of accumulating wealth.

Definition

Alternative investments are basically just anything that you cannot invest in at this point in time via a traditional form of investing, such as a 401k or stock market. Therefore, anything that falls into the category of stocks, bonds, cash, and so on is considered as not an alternative investment.

As people accumulate more wealth and get greater salaries, they may find that they want to invest in ways outside of the stock market. And who can blame them, the stock market can be great, but there are better ways to grow your wealth.

Using alternative investments is also a different way to manage to diversify your wealth. It is also a great way to branch out away from the volatility that you often find in the stock markets.

That being said, while you can invest in alternative investments to diversify, you should not get too ‘into it’, it is still a form of investing, and you should always be cautious with how much you invest.

Rise Of Alternative Investments

Alternative investments did not just come out of nowhere, they came about in several ways. Of course, more and more investors and different firms alike were getting involved, more now than ever seen before.

In fact, in 2020 there was a survey looking into individuals who have a high net worth. This survey found that around 87% of them were looking to maintain or even increase the allocations they had in alternative investments over the coming year!

The overall amount of institutions that had been invested in via private equity back in 2015 was around 6,170, but now, we are looking at 8,400, maybe more. It is continuously growing!

However, do not think it is a new concept, some forms of alternative investments have been around since before Christ, they have just risen to prominence more in the last decade or two.

Different Types Of Alternative Investments

Guide to Alternative Investments

There are plenty of types of alternative investments to choose from as well. It is not a form of investing that is limited at all.

But, we have picked out the 10 most common types of alternative investments that are found today. Note that with this particular type of investing getting more popular, we must always be aware of what is going on.

You never know if a new alternative investment may crop up, so keep your eyes peeled!

Fine Art

Let’s start with the one that even a newbie to investing will be familiar with.

Fine art investing is pretty simple, and it has been done for quite some time. You purchase the artwork, and you wait for it to increase in value over time.

You may be a risk-taker and choose a new artist who you think will become much more popular in the coming years. Or, you could hire an art consultant, or take a course. It is quite the skill to choose just the right piece that will accumulate value.

This particular type of alternative investing is considered to be fairly liquid, so it is often time-consuming and difficult to be able to turn the investment into a profit. Let’s not forget that art needs protection and preservation, as well as proper storage!

Real Estate Crowdfunding

You probably already know what this is, but the name will be new to you.

Crowdfunding is the process of providing investors with new opportunities, helping them to fund a business for a particular stake in the business.

When it comes to real estate, it would mean that you would gain profits from the property.

The only downside to this type of investing is that it does require a fair bit of time and effort. Because you will need to make sure that your money is going to the right places and as such you will gain returns from this investment.

Private crowdfunding is usually only allowed for accredited investors, so do be aware of this if it interests you. Check out different platforms to see what works for you.

Commodities

What is a commodity? Commodities are known as being economic services or goods. So, if you choose to invest in a commodity, then you will be investing in this like precious metals, for example.

When put this way, it is hardly a new type of investing.

However, precious metals are not the only options, you can also invest in corn, wheat, tea, coffee, crude oils, natural gas, sugar, and so on.

Some of these will be purchasable in ETFs, and of course, you can physically purchase heavy metals.

This is quite the niche to invest in, so make sure you have done your homework before you jump in,

Hedge Fund Investing

Hedge Funds are when money is collected from a multitude of accredited investors. This provides capital for many different investments, which helps in decreasing the risk that notoriously comes with investing.

These hedge funds are an option that could fund anything from currency, stocks, and even publicly traded security.

Hedge funds will typically have a manager at the head. This manager will give advice on investments and will make decisions about the investment portfolio.

Therefore, if you do choose to invest in a hedge fund you should remember that you will not always have a choice in where your money will be going. Instead, you will only have the choice of which hedge fund you will choose.

It can be a great option but isn’t ideal for those investors who like to have more of an element of control over their investments.

Owning A Rental Property

This is an option that not many people see as a form of investment, however, it is a form of investing. Owning rental property is a great and very popular way to make money.

This can be a very profitable way to increase your wealth. Having reliable, quality tenants living in your rental property can create a consistent form of income, and expenses will only be limited to repairs and general maintenance.

You can also own real estate rental properties and not have to manage them, but it does mean you could need to hire a property manager or property management company. It can be costly, but you would not need to oversee any day-to-day running.

Peer-To-Peer Lending

Another option is peer-to-peer lending. This is when lenders will combine cash with each other in order to lend money to others.

There are platforms available for this. You can spread capital across many loans and profiles which gives you diversification in your holdings and minimizes risk. It is also to customize your portfolio for peer-to-peer lending according to your appetite for risk and amount of time in investing.

Lending money is risky though, and there is always the worst-case scenario that you won’t get it back. If you do this kind of investing, remember that these loans are not secured, so there is no collateral.

That being said, it does give you the chance to diversify more.

Fine Wine

Fine wine is an alternative investment that is more popular than most people realize. It is also a way that can generate a passive income. Thanks to it being in high demand and scarce in its supply, fine wines make for an amazing investment opportunity.

An incredibly small 1% of all wine in the world is actually worthwhile investing in, so it is not easy to invest in them or even source a good one. What makes it worse is the decrease in supply as each bottle is bought, lost, or consumed.

With the demand for fine wines on the rise, there is a low indicator of any change in demand, even as the prices rise, the demand stays the same.

However, fine wine does have an average return of 13.6% over 15 years. In recent years it has grown a huge 23% in a single year (2021), so it is still a good market to get into.

Equity Funds

You could also try private equity funds. This type of alternative investment gives capital to the companies you won’t find on public stock markets. However, they are different to venture capital, as these are not start-ups.

When you gain a stake in a company, it will usually be part to restructure the company and grant them enough capital to increase its growth. If it liquidates the stake, it becomes a profit and as an investor who is accredited, you will get a share.

This can be a great way to invest if you enjoy public stocks but want to change things a bit in your investing.

Equipment Leasing

In any business, equipment is one of the costliest things. This is why most companies tend to avoid buying the equipment themselves and instead choose to rent them. So, one way to generate a new income is to get involved in equipment leasing.

As so many businesses will rent equipment through leasing funds, which are engaged in limited-time partnerships, it’s an opportunity.

You can allow a fund manager to make the investment regarding what equipment you should acquire. They will offer it for rent, and you will get the monthly payments as a result of the equipment being rented out.

This will last until the lease comes to an end, or until the fund sells the equipment. Whatever comes first.

Starting A Business

Finally, the one we all forget. Investing in ourselves is still an investment. Have a business idea? Investing time and money into that business is an alternative investment!

In fact, this can be one of the most lucrative alternative investments, but it could also crumble and fail and leave you dealing with financial and emotional turmoil as a result.

Ideally, the best way to do this would be to put some money into your business and invest the rest of what you can invest in other places.

A part-time business is a good idea, therefore you do not need to risk the security of full-time employment or other investments as a result.

If it works, you will benefit from the extra money on the side. Multiple sources of income work well, just make sure it is manageable.

Are Alternative Investments Right For You?

Guide to Alternative Investments

Plenty of alternative investments that we have mentioned here are only possible for investors who have a high income or a substantial net worth.

This does mean that not all alternative investing is for everyone and there are some forms of alternative investments that are only really accessible to a specific group of people.

However, there are plenty of opportunities for everyone. Such as our final item on our list, anyone can start a business and invest in that. But, is any of this right for you? Who is it right for?

Active Investors

Active investing is a reference to ongoing buying and selling as part of an investment strategy used by the investing party. An active investor will usually make investment purchases, continuously monitoring activity to get the best profit from them.

In a sense, active investing, in itself is a career, it is time-consuming and will require a lot of hands-on work. Active investors do not just let things sit and accumulate wealth. It requires work.

Alternative investments work well for active investors, and alternative investments tend to work well for them, as being active in a multitude of alternative investments is important, as would be such with investing in real estate, lending, and starting a business.

If you are an active investor, alternative investments have many opportunities in real estate. The best alternative investment opportunities for an investor who is active would include owning one or more rental properties.

However, house flipping is also a good alternative investment, as is private equity if you approach it with a more active form of management.

Whatever the case, active investors have a lot to gain from investing in alt investments!

Passive Investors

A passive investor is essentially the opposite of an active investor. They do not participate in the everyday decisions or running of their investments, companies, and so on.

Even if they are in a partnership, a passive investor would likely be deemed a ‘limited’ partner instead of being a ‘general partner’. This type of investor usually prefers to build their wealth slowly but steadily.

They are the investment version of the saying ‘slow and steady wins the race’. Types of investments such as fine wines and fine art investments are typical of passive investors. Purchasing these items that accumulate more wealth with age/

Unlike their aforementioned counterpart, passive investors will be unlikely to seek out a profit from price fluctuations in the short-term, or good market timing, but instead the slow and steady increase of worth.

Alternative investments tend to be a great option for passive investors as they can provide a strong return that doesn’t need much time to manage.

As well as fine art and fine wines, passive investors could choose mortgage note funds, private equity, precious metals, and more. In fact, many people are passive investors without even knowing it, as collectibles are a form of passive alternative investment as they accumulate value with time.

Does someone you know have a mint-in-box limited edition action figure? They aren’t geeks, they’re passive alternative investors. Although it may sound strange, on a large scale it can have a tremendous turnaround.

Limited Access

While anyone can invest in the slowly accumulating growth in value of a collectible. The fine art world might be open and fine wines, but not all areas of alternative investing are as open as these.

That does not mean to say they are closed to particular individuals, but access to some areas of alternative investments are usually limited to those with a high net worth, or to those who are specifically allowed to invest in securities that are not always necessarily registered with regulators of finance.

Typically, this limitation will have investors fall into two particular groups known as qualified purchasers and accredited investors.

Of course, this is not to say that this is true for every area of alternative investment, but in some areas.

Typically, an accredited investor will have to have an income (individually) that exceeds at least $200,000 over a two-year period. They will also need to be expecting their income to continue in such a fashion.

A qualified investor should have a portfolio of their investments that is worth at least $5 million-plus. Investors like such are believed to have special information at their fingertips or to have advisors who have access to sophisticated knowledge in the area.

Note that a large number of online marketplaces that are available for alternative investments will have a multiannual minimum for holding requirements regarding your alternative assets.

Requires A Lot Of Capital

We want to state first that this is not true for EVERY form of alternative investment, but it is for most.

While anyone can invest in collectibles, and many commodities are widely mainstream, not everything is so available to the ‘normal person’.

Some of these alternative investments do require gross capital. It is unlikely that you will be able to afford to enter the real estate market as an alternative investor on the money you earn from a 9 to 5, it’s not realistic, nor are you likely to have enough to get into equipment lending.

However, alternative investing is very broad, and even though there are many types of alternative investments that do require a lot of capital, not all of them do.

Before you jump into alternative investing, understand what is reasonable in terms of your capital, and narrow down your options from there.

Need A Diversified Investment Portfolios

Part of investing in alternative investments is to help build and diversify your investment portfolio, it helps it grow and brings you many sources of capital growth. They provide you with the opportunity to diversify your portfolio and reduce the risk you have over all your investments.

However, having alternative assets in your portfolio is best suited for an investor who already has a well-diversified portfolio.

So, for an investor who is already feeling happy with where they are in the allocations of their traditional investments such as ETFs, stocks, bonds, and so on, then the next logical step is to turn to alternative investments.

This is not to say that a person who has not touched stocks, bonds, and ETFs needs to do so before they consider investing in alternative assets, however, it is beneficial to have already diversified at least a little with traditional investments.

It just gives your portfolio more body and shows you are an experienced investor.

Again, it is not a requirement for every type of alternative investment, but it is beneficial.

Benefits Of Alternative

Guide to Alternative Investments

Alternative investing is not for everyone, but for those who chose alternative investments, there are some great benefits to choosing this type of investing.

We won’t list every single benefit, or we would be here all day, and you’d never get around to diversifying your portfolio. So, here are the top 6 benefits of choosing alternative investments!

Uncorrelated To The Stock Market

If you’ve ever spent some time investing in the stock market you will probably make losses as large as you have made wins. You will feel close to a heart attack as you watch your portfolio plummet.

Diversifying away from a focus on the stock market is half of the reason so many investors will turn to alternative investments, it balances things out and makes those stock drops not hit so hard.

Investments that are not in correlation with the stock or bond markets mean that these investments won’t change as are relative to the typical fluctuations of these markets.

While some may think that they are diversifying by holding public-traded alternatives, these are still volatile and won’t add all that much value to your investment portfolio.

Having alternative investments means that you have protection even when the stock market drops aggressively, not all of your portfolio will suffer from it. Stocks are known for being unpredictable, even in a stable economy, which we don’t have right now.

But, alternative investments are much more secure and protect you and your portfolio.

Direct Ownership

Although this is not the case for every form of alternative investment, it is true for most.

When you make a public investment, you buy a ‘paper’ asset, you do not technically ‘own’ the asset. However, if you were to invest in fine wine, fine art, or collectibles, then you do own that asset.

If you have a rental property as an alternative asset, you own that home. What about private funds? You’ll have direct ownership of whatever they end up purchasing.

For many, having this direct ownership adds just another layer of security to the investment.

If you invest in a stock, you don’t really ‘own’ anything, but when you own something you’ve invested in, there’s a safety in that investment.

Less Volatility

Having spoken about why alternative investments are better than traditional investments, let’s circle back to stocks for a moment. Stocks, like cryptocurrencies, are some of the most volatile forms of investment ever seen. They fluctuate so fast, and you never know when you will see a rise or fall.

This makes this type of investing extremely volatile. However, alternative investing does not have this problem. Of course, you do not know exactly how much a piece of fine art or a bottle of fine wine will increase in value, but it’s hardly likely to decline in value.

Volatility isn’t a concern for long-term investment, it can still average a profit over years, but the volatility stops compounding, and compounding brings about better capital. Alternative assets will compound more as they do not fluctuate as the stock market does.

Tax Benefits

Alternative investments have another benefit that is appealing to many investors, their tax benefits. If you have many alternative investments you will keep more profit.

With many alternative investments, you will be a partial owner of a fund, and therefore, the benefits in tax will get passed to you.

One of these benefits is pass-through depreciation, as well as capital gains treatment in the long term.

This is often found in real estate funds, which experience depreciation expenses. Energy investments such as oil and gas will also have a depreciation treatment on tax as well.

Stronger income

Alternative assets will not all be a cash-flowing investment, some may give you cash on a quarterly basis, or a monthly one. However, some can be cash flowing. They are able to produce a strong income.

Some will be made to have a strong return when you get paid first.

This is much harder on the other side of things, with bonds and stocks. For those who are struggling to get a decent cash flow in their portfolio, having alternative assets can help to increase cash flow.

Taking the focus away from stocks alone can reduce volatility and generate a better return. This is part of why diversification is so important, it helps you to generate a stronger income in your portfolio.

Passive Investments

As an investor, you likely place quite the high price on your time. Most people do, even if they are not investors. Active investors value their time even more because managing portfolios is hard work.

If looking into real estate, you are looking at a lot of time invested, it’s not just about getting the property, finding residents, and keeping it in shape, but there is a learning curve to this work as well.

Thanks to the investing world getting bigger and with changes to regulations, there is a new passive world of alternative investments. These investments are not needy, they do not need constant management.

Some alternative investments are so passive, you can just let them sit and accumulate value.

Summary

Any investment opportunity will come with pros and cons. Not all alternative investments are for everyone, but it is a broad type of investing that means there is something for everyone.

Alternative investing is less volatile than traditional investing, it gives you more security, although some alternative investments will require large capital, for active investing.

This type of investing can range from collectibles, agriculture, real estate, gold, and more. There are options for passive or active investing in this regard, allowing you to fully diversify your portfolio. However, like any form of investment, you need to do your research and understand that while alternative investments are not volatile like stocks and bonds, there are still plenty of associated risks involved.