Alternative asset or alternative investment fund (AIF) is any investment other than in equities, fixed income and cash.
This term is rather vague and encompasses range of assets as precious metals, collectibles (antiques, vintage cars or watches), some financial assets (private equity, real estate, raw materials), hedge funds and cryptocurrency.
In this article we will discuss what are alternative investment funds, their pros and cons, and how they can help in diversification of your investment portfolio.
An Overview of Alternative Investment Funds for Higher Returns
What are alternative investment funds? Here’s the breakdown:
Real Estate
Investment in real estate involves allocating funds to physical properties or property-based securities. It also includes putting money into real estate crowdfunding platforms, real estate investment trusts (REITs), and real estate mutual funds.
Along with the high growth potential of physical assets, investors seek operating income to regulate cash flow and achieve investment goals.
Commodities
Other alternate investment funds include commodities, such as silver, gold, oil, and agricultural products. These tangible goods are attractive investment options for investors due to their real-world uses, minimum investment, and perpetual demand. For instance, gold is considered a stable investment due to its industrial applications and role as a store of value.
Farmlands
Traditional investments like farmlands, (a blend of commodities and real estate) are also types of AIFs for investors. In addition to potential high returns from land appreciation, farmland investors can also benefit from commodity sales.
Art and Collectibles
Some hobbies like art, entertainment memorabilia, sports memorabilia, high-end watches, or other collectibles may serve as types of alternative investments. These AIFs are suitable due to their historical significance that can develop worth over time. For example, the associated athlete, the artist, or the associated movie star can gain historical significance over time.
Cryptocurrency
Compared to traditional investments, cryptocurrency is the evolving form of digital currency. This AIF is a privately pooled investment vehicle. Some argue that cryptocurrency does not provide a reliable hedge against other risk-on investments. However, it may offer passive income or capital appreciation due to staking rewards.
Private Equity Funds
Redefining the scope of private investment in public equity or private equity and social venture funds involves investing in startups or privately held unlisted companies, offering a different risk-reward profile than public stocks. Investors may look to invest in startups to achieve investment objectives, instead of putting capital to the shares of public companies.
Peer-to-Peer Lending
Peer-to-peer lending is a unique investment that refers to providing loans to individuals or businesses through online portals that link fund seekers to investors. This is a kind of investment very similar to bonds, though it involves more privately pooled markets and riskier clients. However, it has potential for higher returns, though not always.
Risks and Benefits of Alternative Investment
Benefits
Here’s a summary of some common benefits of alternative investing:
Low correlation with traditional asset classes (e.g. private markets assets are typically very low correlated against public investments like stocks and bonds). Therefore, investors seek alternatives to help them diversify their portfolio and reduce massive risk.
Also, investing in alternative funds typically provides higher returns than conventional investments. Moreover, alternative asset classes are available in various forms and structures, allowing investors to choose market assets that align with their preferences, risk appetite, and investment goals.
For example, investors may choose some cryptocurrencies depending on passive income opportunities.
Illiquid investment funds allow investors to access less active markets. It not only looks interesting (e.g. a baseball athlete may be passionate about buying an autographed baseball), but it may be difficult for investors to find the right buyers, making the market less liquid.
Preventing the investor from selling it based on emotions may prove beneficial in the long run as this may add to the price.
Risks
Following are some disadvantages of alternative investments:
Due to their limited availability, alternative investment funds or AIFs generally come with higher fees and expenses relative to conventional investments.
Like hedge funds and private equity that typically charge big performance or management fees, leaving investors with a fraction of their money. Alternative investments (as opposed to stocks and bonds which have low-fees, frequent trading) have substantial costs that are limited by trading and available products.
When illiquidity can be an investor’s friend to help reduce the frequency of impulsive selling, it also becomes hard from time-to-liquidate assets that one needs. Think what happens if an investor wants to liquidate the cashflow, sell rare items like movie memorabilia right away.
As there are no active markets for such rare pieces, they may struggle to sell it quickly, potentially resulting in a loss of value. Because alternative investments are not usually publicly traded, it may be challenging to get market data on historical trends or pricing. So, AIFs are subject to market risks.
Public companies must meet numerous reporting rules. Whereas alternative investments face fewer regulatory restrictions, and may be subject to a higher risk of misconduct, fraud, and other abuses. As previously stated, alternative investment funds have the potential of higher returns, they are considered riskier investments.
Alternative investments are also more intricate. Some may offer complicated terms and structures that may be difficult for investors to understand. It results in making inappropriate or uninformed investment decisions. Moreover, some items may not show readily available market prices, making it hard to assess their true value.
How to Invest in AIFs?
Switching from the assets you are working with to specialized investment vehicles seems a different experience. Some may need considerable financing and research, others may only need a few clicks of a mouse button.
Generally speaking, here’s how to put capital into the following various alternatives:
Private Equity
Private equity investment commonly includes purchasing shares in a private company or a group of companies. Investors may allocate funds to private equity investments via venture capital funds, private equity firms, or crowdfunding platforms.
Real Estate Funds
Investors can invest in real estate through different means, like investing in real estate crowdfunding platforms, putting funds into Real Estate Investment Trusts (REITs), or buying rental properties.
Hedge Funds
Hedge funds may allow access to only accredited investors. Investors typically need a substantial amount of capital and a high net worth to qualify for hedge investments. They can invest in private investment pools through brokers or hedge fund managers.
Commodities and Precious Metal Funds
Commodity financing includes purchasing physical assets like gold, silver, oil, or agricultural products. Investors can allocate capital to commodity assets through mutual funds or exchange-traded funds (ETFs), or commodity trading platforms. So AIFs are generally suitable to investors for their minimum investment amount.
Final Thoughts
Alternative investment funds, for a variety of assets, including from hedge funds to private equity along with low volatility and high return provide an ability to be part of multiple asset classes.
However, AIFs are expensive, high-risk beasts that have high thresholds for high net worth market participants.
Therefore, in-depth research and seeking advice from an investment expert are crucial for individuals striving for AIF investments.
We hope this article better explains what are alternative investment funds? Don’t hesitate to contact Quadrawealth to seek more insights into investment strategies.
FAQs
Q1. What are the Key Characteristics of Alternative Investments?
A: AIFs may command high fees and minimum investment beyond typical investments like ETFs, and mutual funds. They also require very low transaction costs and the financial data for these assets. You should see a financial advisor to make the most effective investment recommendations.
Q2. How Can Alternative Investments be Beneficial for Investors?
A: Some investors look for alternative investments because they have a low correlation with stock and bond markets. It implies that they can retain their worth during the downturn. Also, the assets like gold, oil, and real property have a high hedge against inflation. All these features make alternative investments useful to investors.
Q3. What are the Regulatory Standards for Alternative Investments?
A: The regulations around AIFs are not as defined as general securities. Alternative investments, unlike publicly-traded securities are not generally listed on exchanges.
So, most of these investment tools are available to institutions and wealthy accredited investors only.
