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Investing in Alternative Assets

Definition of Alternative Investments

An alternative investment is regarded as an investment product other than traditional investments such as stocks, bonds, and money markets.

Alternative investments include commodities, financial derivatives, hedge strategies (or absolute return strategies), real estate, private equity, venture capital and other assets. Alternative investments are often defined as “alternatives to conventional investments that are essentially listed securities, cash and bank deposits and lending”. It is often claimed that their other defining characteristic is a low correlation of returns with conventional investments. This means they can improve diversification, which is a key motive for investing in them.

Alternative investments are less accessible to small investors then securities because they are often illiquid, require large amounts to be invested, and may be barred by regulators from sale to the general public. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals.

Many alternative investments also have high minimum investments and fee structures compared to mutual funds and ETFs. While they are subject to less regulation, they also have less opportunity to publish verifiable performance data and advertise to potential investors.

Alternative investments can improve both returns and diversification, but the risks are considerable. Their value may plummet as fashions change (collectibles), as the behaviour of markets changes in ways that makes particular strategies unprofitable, and from drivers unique to that type of asset. Without fundamental analysis, or much in the way of regulation, they also tend to be vulnerable to hype and manipulation.

While the small investor may be shut out of some alternative investment opportunities, real estate and commodities such as precious metals are widely available.