Have you ever wondered what art dealers, landlords and crypto investors have in common? The answer is they all deal with alternative investments. This article will provide some guidance on the ins and outs of these.
What are they?
Fundamentally, these are any investments that don’t fall into the traditional scope of financial markets. This means anything that isn’t regulated or traded publicly, i.e. not stocks, bonds, and cash. Alternative investments can be incredibly broad, covering a large range of categories. These may include:
- Real Estate
This can include both private and commercial real estate. This tends to be a very stable long-term investment with income most often coming from charging rent, giving the landlord steady cashflow.
This may be one of the oldest form of investments, and is an incredibly broad category. Fundamentally this includes any natural resources, be they precious metals such as gold or silver, natural gas, or olive oil. These tend to follow trends of supply and demand, meaning that with higher demand comes increased investor profit.
- Private Equity
This means any capital investment made into private companies, i.e. those not publicly listed on a stock exchange. This could include Venture Capital Schemes, meaning investments in start-ups and early-stage companies, and Growth Capital Schemes, meaning investments that allow older companies to restructure and expand.
- Hedge Funds
These are investment funds which are designed to produce positive returns, no matter how the stock market is doing. These aren’t generally a good option for everyone, however, as they often require a large amount of investment capital to qualify, meaning they tend to only be available to high-net-worth individuals.
This includes any physical item of value, which, through maintenance, have the possibility of appreciating in value. This could include anything from vintage cars to whisky to baseball cards. Nevertheless, these investments can carry a high level of risk, as they come with high acquisition costs and a potentially costly duty of care and maintenance.
This is a novel form of investment, allowing for investment via digital form only. This can be quite a high-risk form of investment, due to the unregulated, volatile nature of crypto.
Alternative investments can be extremely useful, providing you with a diverse portfolio, with the potential for higher returns than traditional investments. They often include more inflation-resistant investments, making them extremely attractive long-term solutions. Take real estate leases, for instance, which will move in tandem with inflation.
These investments also don’t correlate to the stock market. This means that they often have reduced volatility while also potentially offering tax benefits that aren’t provided by standard investments.
They also offer more niche and personal-interest driven investments. Many people see these investments not just as money-making opportunities, but also as hobbies. Take a fine wine collector, or someone who, in their free time, likes to refurbish antique cars.
These investments do come with negatives as well, however. For instance, with many categories, a high level of expertise is necessary in order to actually make a return. This is especially true of collectible and private equity investments, as there isn’t often a lot of information regarding the historical trends and market data. As such, they often aren’t very accessible to novice and amateur investors.
These investments do also tend to relatively illiquid. While this does have its benefits in terms of value protection, it does mean that it is much more difficult to panic-sell. As such alternative investors can’t necessarily rely on their investments if they ever find themselves needing cash quickly.
Finally, alternative investments can come with higher risk than traditional investments. This in turn also leads to some limited accessibility, including higher fees and expenses. The buying and selling of fine art, for example, often includes high acquisition and high maintenance costs for example.
Thus to conclude, alternative investments often can be seen as a distinct and exciting opportunity, as opposed to the standard methods of investing through the stock market and through bonds. They often align with personal interests, can provide high returns and tax benefits, and can carry themselves well in the face of inflation. Nevertheless, there are risks to watch out for, seeing as they do tend to act as high risk, illiquid investments. It is important to ensure you have the right expertise and know-how to deal with the world of alternative investments.