Alternative investment involves investment in assets other than the traditional products of stocks, bonds or cash. These assets include the likes of art, antiques, wine, coins or rare stamps – in other words, rare items. Financial assets like commodities, private equity, hedge funds and financial derivatives are also accommodated in alternative investment. Due to the complexities in their nature and the regulations and the illiquidity involved, alternative investment assets are usually held by institutional investors or accredited individuals.
A thorough investment analysis is required before buying and investing in alternative financial resources. They also involve a high minimum investment and fee structures compared to mutual funds. Traditional investment involves risk. We have seen how in recent times the world of finance was hit as bankruptcy triggered panic across the globe. But even in troubled waters, you don’t need to be bearish if you are the proud owner of a few bottles of Bordeaux or a Penny Black or may be a series of Andy Warhol prints as you are supposed to get their money back virtually.
Why do people go for alternative financial investment?
A probable reason why people invest in alternative resources is to diversify and reduce the overall investment risk. Portfolio diversification is suggested to potential investors to minimize the risk. And this can be achieved through alternative investment.
Advantages to investing alternatively:
1. Alternative investment involves low correlation with traditional financial investments like stocks and bonds. As a result several large institutional funds like the pension and private endowments have already begun allocating a small proportion, less than 10%, of their portfolios to alternative investments like hedge funds.
2. It is comparatively less liquid in nature.
Disadvantages to investing alternatively:
1. Lack of published verifiable performance data and minimum opportunity to advertise to potential investors.
2. Determining the current market value of assets is often difficult.
3. Cost of purchase and sales is relatively high.
The most common types of alternative investment include:
• Hedge funds as alternative financial investments include a wide range of investment assets like stocks and commodities, which principally aim at offsetting the potential losses in the markets.
• Future funds as alternative investments are standardized contracts of sale and purchase of commodity at a predetermined price on a specific date. Futures are used to trade currencies and commodities like petroleum and agricultural products.
• Real estate can also serve as an alternative investment option, which typically involves buying and selling of immovable properties like land and premises. It yields rental income as well as capital appreciation.
• Though not always viewed as such, art is certainly an alternative investment. This investment option gained some new traction after the 2008 market downturn and recession period.
• Investment in vintage items, such as fine wine, has proved profitable with consistent high-yield returns, even in the months of 2008 credit crunch.
• The precious metal gold is used as a defensive alternative financial investment, which tends to grow in popularity during periods of prolonged economic upheavals.
In this readily evolving economic climate, as investors are striving to locate the best investment niche, these alternative financial investment options are gaining greater and greater appreciation due to their low-risk and high-yield nature.
Find more about hedge fund investment and certification in finance at CAIA.Org.