Different Types Of Alternative Investments To Choose From

Persistently low government bond yields are creating two problems: a lack of income, and limited opportunity to diversify a portfolio as the cycle matures. alternative investments might help in both regards.

Alternative strategies are usually defined as investments in assets other than stocks, bonds and cash. They include investments in private assets (which are not publicly listed) or investment strategies that use non-traditional approaches, such as the ability to benefit if stocks fall. It is a broad and heterogeneous universe that can be divided into two main categories: the “return-enhancers” and the “diversifiers”.

Continue reading to learn more about alternative investments:

Private equity

Private equity is an example of the best alternative investments. Private equity firms typically raise funds and take capital from both non-institutional and institutional investors. The funds will then be used to place investments in promising private companies. The capital is returned to investors upon an exit event such as an IPO or acquisition after the firm takes its management and performance fee. As mentioned earlier, private equity is a broad classification that encompasses investing in start-ups, venture capital and funding during the development process of a company.

Start-ups and private companies

Investors can directly invest in start-ups and private companies as opposed to investing in a private-equity fund. Investing seed capital directly in start-ups is sometimes referred to as angel investing. This is a high-risk and high return strategy for investors as many start-ups end up failing. A private business will attract partners in a private venture based on a certain valuation. Retail investors can participate in some offerings depending on the type of registration exemption the company relies upon. Companies seek investment capital throughout their life cycles', so more mature companies can also be targeted for investment.

Peer to Peer Lending

Peer to peer lending is a type of high return alternative investments that also comes with risks. The system works by connecting people who need to borrow money with people who have money to lend. These financial matchmakers cut out the banking intermediary. As a lender, you can get much higher interest rates than you would with a savings account. Borrowers usually pay less than with a traditional loan. Peer-to-peer channels or portals are also subject to a tax. In an ideal world, this system works for all parties involved. The risk lies with the borrowers. If they could not access a traditional loan and use the peer-to-peer lending opportunities, it means they come with a poor credit history or they are not eligible for conventional loans.

Art

Owning fine art is another type of best alternative investments. You may focus first on investing in objects from blue-chip artists like Picasso and Monet. Investments from such artists appear to have more steady values. If you're more aggressive, you may the Post-War or Contemporary periods if you can find undervalued objects. However, these works tend to drop in value. Before investing, research past auction prices for that particular object or artist. Also, look for a certificate of authenticity and other items of proof to avoid counterfeits.

Antique cars

Collectable vehicles can be a type of high return alternative investments. A Ford Pinto probably isn't a wise investment, but a 1964 Chevy Impala Super Sport can be a different story. Like your car, maintenance expenses and insurance payments would be a recurring investment expense.

Collectables

Collectables and vintage items will also be successful alternative investments if you know what's precious. For instance, baseball cards and comic books from the 1950s have a collectable value. Yet similar items from the 1980s may only be worth the paper they are printed on due to overproduction. As most alternative assets require a multi-year holding period to appreciate, certain collectables can produce quick income.

For long term investors able to forego some liquidity, a strategic allocation to alternatives assets can help to improve the overall risk/return profile of their portfolio. The exact weight of the alternative bucket within a diversified portfolio will depend on individual return objectives, investment horizons and liquidity constraints. For investors who do require daily liquidity the range of liquid alternative strategies investing in public markets has also increased in recent years. Investors confronted with negative real cash yields and limited upside from government bonds in the event of a downturn may therefore want to look beyond a traditional 60:40 equity/bond portfolio. Adding alternatives can potentially help them achieve better risk-adjusted returns, increase the yield and increase the resilience of their portfolio. You may keep this article as a reference once you start looking for alternative investments.