2022 became a game-changer year in the finances world, when the SEC made alternative investments more regulated, and thus more available to non-institutional investors.
New opportunities flooded, but with them a lot of questions have arisen:
- What are alternative investments?
- Can I use alternative investments for my IRA or 401(k)?
- Can unaccredited investors invest?
- What are the legal and tax considerations?
Today, we're going to take a deeper look at alternative investment classes, what makes them different from traditional investments, and whether they truly are worth adding to your portfolio.
Alternative investments vs. traditional investments
Alternative investments, often also called alternative assets, are asset classes and investment vehicles that are not stocks, bonds, or cash.
But don't mistake the label "alternative" with "uncommon"—some alternative asset classes, such as real estate or commodities, have been here long before stocks or cash were invented.
Here are the main characteristics that can be attributed to alternative investments:
- Narrow specialisation of the investment managers
- Minimum correlation with traditional investment markets
- Not so much historical risk and return data
- Standalone legal and tax considerations
- Higher fees which normally include performance or incentive fees
- Concentrated portfolios
- Redemption restrictions, such as 'lock-up' periods
In addition to that, alternative assets usually are also less liquid, show better growth rates, and are less influenced by inflation, making them a perfect diversification tool for many investors.
Now let's take a look different categories of alternative investments.
Private equity
Private equity refers to investing capital into companies that are not listed on public exchanges, such as NASDAQ or NYSE. Private equity has several subsets:
- Venture Capital, which focuses on early-stage businesses and startups
- Growth Capital, that allows more mature companies to scale and restructure
- Buyouts, when a companies as a whole, or one of its divisions are purchased completely
Private equity, like most alternative assets, is an active type of investment—when you invest in a private company, you don't only share your money. Investors often offer resources, talent, industry expertise, and even founder mentorship to make sure that their venture succeeds.
Private debt
Private debt refers to various loans provided by investors to inquiring entities. Key feature of a private debt is that it is provided privately—meaning, the investment doesn't come from a bank and isn't traded on the open market.
Both private and publicly traded companies can borrow private debt. In most cases, that is done when additional capital is needed for growth.
For an investor, private debt is a way to make money via interest payments, and the repayment of the initial loan.
Hedge funds
Hedge funds trade a combination of assets with relative liquidity and employ various investment strategies to make the most profit. Managers working at the funds specialise in niche strategies, such as volatility arbitrage, quantitative strategies, long-short equity, and others.
The key difference between hedge funds and other alternative asset classes is that hedge funds are reserved for institutional investors only.
This means that hedge funds are investment tools that can be used by pension and mutual funds, endowments, or the ultra-high net worth individuals.
Real estate
This is arguably one of the oldest asset classes in the world. While there are plenty of real assets available, such as farmlands, natural resources, timberland, etc., the real estate is the most common type.
It is also the biggest asset class in the world.
Real estate can be residential and commercial, but the key ways of making money of it are the same: cash flow from tenants and companies paying rent to use property, and equity that comes with long-term appreciation of the property.
Commodities
Commodities, like real estate, are also real assets, but are related to natural resources. Natural gas, oil, precious & industrial metals, and agricultural products are all commodities.
While commodities can be a great hedge against the inflation - as they are not sensitive to public equity markets - their value is highly dependant on the supply and demand on the market. The prices can also rise and fall depending on season, natural disasters, or other natural events that occur in the world.
Collectibles
Collectibles are often put at the end of alternative investment lists, but that doesn't make them less valuable. This alternative asset class is considered an emotional investment, and is often related with the high risk/high reward strategy.
Investing in collectibles means buying and holding a physical asset with the hope that its value will appreciate over time. Below are some examples of collectibles that you can invest in:
- Watches
- Fine art
- Wine & whiskey
- Classic cars
- Coins, stamps & sports cards
- Other memorabilia
Collectibles are physical assets and require additional care in order to preserve and grow their value over time. These include special storage, regular care, and insurance, all of which can often add to maintenance expenses.
However, if you have experience and knowledge within a specific category of collectibles, you can reap great benefits by knowing, what to buy, and when and to whom to sell to.
Conclusion
As the investment world evolves, so do the tools and vehicles investors use to maintain and grow their wealth. With recent regulatory updates from the SEC, new opportunities emerged for accredited and unaccredited retail investors—alternative assets.
However, not all of them are readily available, due to high entry costs and often very low liquidity, keeping most alternative asset classes still away from mainstream investing.
At Investables, we make the world of alternative assets affordable to everyone. By securitising physical assets from the collectible asset class, we help investors from all over the world diversify their portfolios with assets that have minimum correlation to traditional finances, thus maintaining their wealth at times of inflation and high market volatility.
With Investables, you can build your portfolio of luxury watches, rare wines, blue chip art, classic cars, and other physical assets, starting with as little as $10. Explore our trending collections and grow your wealth with us!
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