Traditional investment options provide significant benefits to investors. These investments include stocks, cash, and bonds. Usually, these assets are more liquid and involve a higher trading frequency. Investors prefer them since they allow more flexibility. Usually, they are widely available, which makes them a valuable investment option.
On top of that, these investments also provide significant returns. However, they may also come with some risks. Apart from the specific risks, they may also obstruct the building of a diversified portfolio. Consequently, investors will opt for other options. These options fall under alternative investments. Similarly, these investments have several types. However, it is crucial to understand what alternative investments are first.
What is an Alternative Investment?
An alternative investment is an asset that does not fall within the traditional investments. As mentioned, the conventional options that investors have include stocks, bonds, and cash. In most cases, these options have significant benefits over others. However, some investors may not have access to them. Similarly, they may increase the risks associated with portfolios.
Therefore, alternative investments provide different financial assets for investment. Another name for these investments is “alts.” In most cases, alternative investments include both tangible and financial assets. For example, these may consist of precious metals, commodities, or private equity. However, these investments may not be as frequently traded in the market.
In essence, alternative investments include assets that vary from traditional investments. These assets differ based on their liquidity, regulatory mechanism, complexity, and management. In most cases, alts are more illiquid compared to the conventional options. The primary reason for its lower liquidity is the lack of trading volume.
On top of that, alternative investments may not have similar regulatory mechanisms. In most cases, these investments are less transparent. Furthermore, the lower regulatory requirements may be critical for investors. Despite that, alternative investments can be crucial in building a diversified portfolio. Therefore, they can reduce the risks of investing in traditional assets only.
Alternative investments also demonstrate a low correlation with traditional assets. Therefore, they present a decent option for investors. From the existing alternative investments, some are more prevalent among investors. Usually, these investments provide better markets and conditions for investors. Despite that, all alternative investments can offer the same benefits as others. However, the risks and rewards may differ based on the type of asset.
Overall, alternative investments are assets that vary from the traditional options. Therefore, they do not include stocks, cash, and bonds. These investments come with some drawbacks, for instance, lower liquidity. However, they can provide significant benefits as well. One of the most critical of these includes helping in portfolio diversification. There are several types of alternative investments from which investors can choose.
What are the types of Alternative Investment?
Based on the available options, investors can choose from different types of alternative investments. These types provide specific benefits that others may not. However, they may also have some drawbacks. In most cases, investors must decide the type of alternative investment for investing. Some of the most prominent types of alternative investments are as below.
Stocks involve investing in public companies. Usually, these investments come through the stock market. However, some companies may also be private. These companies do not trade their shares in the stock market. Nonetheless, it does not imply investors can’t invest in those shares. Private equity is a type of alternative investment that includes private company shares.
Private equity provides similar features as stocks. However, these shares do not have a primary market like the stock market. Therefore, they fall under alternative investments. Private equity comprises funds, and investors invest directly into these shares. Usually, investors must get these shares from the private company itself. In some cases, they can also acquire them through existing shareholders.
Real estate is one of the most prominent types of alternative investment. In most cases, it involves identifying and investing in rental properties. However, modern investment options in real estate may also consider other options. For example, these may include real estate investment trusts (REITs). Nevertheless, real estate provides a crucial alternative to traditional options.
Real estate can be a crucial part of a diversified portfolio. Usually, these investments do not experience the same changes that others do. Therefore, investors prefer them due to the stability that comes with the real estate market. In some cases, however, the market may also be highly volatile. Despite that, real estate investments can provide stable incomes.
Hedge funds are another type of alternative investment. It is an investment vehicle in which affluent investors invest. Usually, these funds require the active management of investment pools. They also have a manager who is responsible for choosing the investment strategy. In most cases, hedge funds trade esoteric assets through borrowed capital. Through this strategy, these funds aim to beat the average market returns.
However, hedge funds require significant investments. Therefore, these types of alternative investments are not suitable for all investors. Although the name suggests the use of hedging techniques, hedge funds don’t use them. Some of the existing funds may prefer that strategy. Nonetheless, most hedge funds do not use hedging as a part of their investing strategies.
A commodity is a basic good used in commerce. It represents assets that are interchangeable with similar goods. In most cases, commodities include products that come from the earth. These products have a uniform quality with a large production quantity. For example, commodities may consist of precious metals, grains, gas, oil, chemicals, gems, etc. Like the other alternative investments, commodities are also a valuable investment option.
Commodities are a prominent type of alternative investment. However, they may relate to the supply and demand of the underlying item. A profitable strategy for investors may include exploiting those levels to generate income. In some countries, trading commodities is more prevalent than in others. Despite that, these are available for investors almost everywhere.
In the modern earn, cryptocurrency has become a well-known type of alternative investment. Despite falling under the category, these investments are more liquid than the other forms. Cryptocurrencies are a type of digital currency. Nonetheless, they are not cash or cash equivalents. Most investors prefer these investments due to the ease of investment.
Cryptocurrencies generate significant capital gains through the right strategies. Some of the most prevalent options within this category include Bitcoin, Ethereum, Ripple, Dash, Litecoin, Dogecoin, etc. Investors can also alternate cryptocurrency for cash resources. Due to their wide acceptability as a payment option, they can be a highly viable alternative investment.
A derivative is a contract between two or more parties. This contract derives its value from an underlying financial asset. As that asset’s value changes, the derivative’s value also fluctuates. Usually, these investments use bonds, commodities, currencies or stocks as underlying instruments. Derivatives are a prominent type of alternative investment.
Investors can select various options within derivatives. Each of these options has its advantage and drawbacks. Nonetheless, they enable investors to diversify even further within this category. Some prominent types of derivatives include future and options. Investors can invest in these options through over-the-counter (OTC). On top of that, they may also be available through specialized exchanges.
Investors may not prefer the traditional investment options, including stocks, cash, and bonds. Therefore, they will seek other substitutes. These usually come in the form of alternative investments. These investments include assets that do not fall under the traditional investment options. Some of the types of alternative investments are available above.