With swarming options like bonds, mutual funds, stocks, and ETFs, investors are still not getting the stability they are seeking without compromising on their potential gains. Adding to this are the economic uncertainties and market fluctuations, that again lead to the bidding apprehensions of the investors. This frustration often results in investors settling for traditional options that guarantee minimum risks with lower returns but hang on – this is not the case with smart and informed investors.

They know you have the option to invest wherein you decide the rule, play with it, and can be definite of higher returns- We are talking about Are Structured Products Considered Alternative Investments. It is an emerging financial instrument that’s gaining momentum because of its enticing features…

Continue to read on as we unravel how structured products can diversify your portfolio and maximize your returns with lower risks. Finance gurus often termed Structured Products as the best alternative investments to consider- Are they right? Let’s find out!

What are Alternative Investments?

Defining Alternative Investments

Alternative investment is a financial asset that falls outside the conventional investment categories or traditional securities (cash, bonds, and stocks). Unlike traded assets, these investments are less liquid than traditional investments. Intended for long-term growth. Due to their marketability, they cannot be easily converted into cash. While they come with risks alternative investments have the potential to yield returns. It’s important to note that these investments are less regulated so thorough analysis and understanding are crucial, before diving into them. Alternative investments are also called alternative assets. The alternative investment industry is expected to grow at a higher rate.

Alternative investment vehicles include Hedge funds, private equity, real estate, commodities, collectibles etc

Let us discuss this in detail below.

Types of Alternative Investments

The different types of investments are

• Hedge Funds:  These are the funds where money is collected from numerous private investors. The private investors come together to form a limited partnership. The money of the private investors are pooled and is managed by professional fund managers. Hedge fund managers then invest this amount in non-traditional assets so that they can provide a high return to the investors. Hedge Funds are available to high-net-worth individuals only as the minimum amount to be invested is also high. The hedge funds involve risk, so the investor should be careful while investing in hedge funds.
• Private Equity: Private equity investment firms invest capital in private companies not listed on the stock exchange.  The private equity firms raise money in the form of private equity funds. The private equity firms help venture capital ( focuses on ventures and start-ups) and growth capital (helps mature companies expand or restructure). The private equity firm maintains a relationship with the investing firm and provides benefits like talent sourcing assistance, and mentorship to founders
• Real Estate: Real estate is the world’s biggest asset class. There are two types of real estate investment. Direct investment in property and real estate investment trusts (REITs). Direct investment in property helps in capital gains over a period of time and also rental income can be obtained. Real Estate Investment Trusts (REITs)  is investing in a portfolio of real estate without the traditional way of real estate transactions. REIT can be bought and sold on the stock exchanges.
• Commodities: Commodities are inputs such as materials or resources, used in the manufacturing of products. They include natural resources and agricultural products such as gold, silver, petroleum, metals ores, wheat, cotton, coffee, sugar, soybeans, and various harvested crops. There exist investment opportunities in commodities where investors and traders can make profits through buying and selling on either the spot market (cash) or through derivatives like futures and options. When there is an increase in demand for a commodity its price also rises accordingly. The gains for investors are influenced by the supply and demand dynamics of these commodities. They are commonly seen as a safeguard, against inflation.
• Collectibles: Collectibles are investing in some products with the hope that the price of the product will rise over time. Collectibles include articles such as vintage cars, rare wines, fine art, Mint-condition toys, stamps, coins, and baseball cards. The investment value will not be obtained until it is sold.

What are Structured Product

Structured products are a combination of Swiss bonds and derivatives. The Swiss bond gives a fixed interest or fixed income on the bond which secures the capital and the derivatives are used for higher returns. The derivatives are linked to underlying assets. The return on the derivatives will depend on the performance of an underlying asset. The structured product is tailored as per the investors’ needs, risk-return objectives, and financial goals. Structured products offer investment opportunities for retail investors.

A structured product is a mixture of different asset classes that helps reduce the risk of a single asset class performing poorly. The structured product includes assets like stocks and bonds, currencies, commodities, indexes, etc. The minimum investment in structured products is $100,000.

Are Structured Products Considered Alternative Investments?

Structured notes are not traditional investments like cash, bonds, and stocks. Structured notes are a combination of bonds and derivatives. Derivatives include stocks, commodities, currencies, options etc. Since structured notes are not limited to stocks and bonds and include a wide range of derivatives it is considered an alternative investment.

Structured notes also yield high returns and cannot be easily sold in the secondary market making it illiquid. All these features makes it an alternative investment.

Benefits of Structured Products as Alternative Investments

Customization

Structured products offer customization allowing investors to tailor their investment approaches based on market views and risk profile. This level of flexibility is often not found in traditional investments.

High Returns

Structured products involve investing in assets that perform well and provide opportunities, for leveraging.
Structured products provide higher returns than traditional investments.

Principal Protection

In structured notes, the investor can select the principal protection based on his needs and risk-return objective. The investor can choose full principal protection, partial principal protection, or no principal protection at all.

Risks Associated with Structured Products

Complexity

Structured products are complex to understand. Some investors may find it difficult to understand them.

Market Risk and Credit Risk

Investments in structured products are not exempt from market volatility. Furthermore, investors are subject to the credit risk of the underlying firms through credit-linked structured products. A default by these businesses can result in large losses for the investor.

Liquidity Concerns

Structured products can be redeemed only on the maturity date. Structured products can not be easily sold in the open market. Some structured products can be sold in the secondary market.

Comparing Structured Products to Other Alternative Investments

Structured Products versus Hedge Funds

Structured products and hedge funds are both classified as alternative investments, but they have quite different structures and strategies. While hedge funds pool cash from many investors and then apply some techniques to create returns. Whereas structured products are tailored investment vehicles that meet specific financial goals.

Structured Products versus Private Equity

Private equity refers to the direct investment in private enterprises, whereas structured products enable an investor to invest in different asset classes. Both these instruments offer higher return potential. Nevertheless, structured products are tailored to the investor’s needs and risk-return objectives.

Structured Products vs. Real Estate

Direct ownership of property generally offers steady cash flow in the form of rent and capital appreciation as part of real estate investments. On the other hand, the structured products provide access to real estate markets.

How to Invest in Structured Products

Assessing Suitability

Investors must take into account their financial objectives, risk tolerance, and investment horizon before any investment in structured products. It is suited for investors who have a high level of understanding of the complexity involved.

Research

Investors should research the underlying asset and the issuer of the structured notes. It is important to check the creditworthiness of the issuer. This strategy helps in mitigating the risk and making informed investments.

Consulting Financial Advisors

Structured notes are complex to understand. Financial advisors help the investors to meet their investment objectives and financial goals

Conclusion

Structured products are considered alternative investments. Alternative investments are not suited for all kinds of investors as they cannot be converted into cash easily. However, they provide higher returns compared to traditional investments.

Structured products may look very appealing due to its feature of customization. However, the risks should be taken into consideration. Investors can take advice from a financial advisor before investing in structured products so that they can meet their investment goals.