It is no secret that the digital age has created a greater number of alternative investment opportunities, perhaps most notably cryptocurrency.However, other alternative investments have long existed, yet traditional options such as stocks, bonds, and cash have typically been the popular choices. Traditionally, investors have looked to equities, bonds and cash instruments as places to put their money on the expectation that doing this will generate a return on their investment.But in recent years, extended periods of very low interest rates around the world have left many investors with inadequate returns on their bonds and virtually no return on their cash investments. Rising volatility on equity markets has also left many of the more adventurous institutional investors bruised and disillusioned. Alternative investments are investments in financial assets other than bonds, stocks, cash, and fixed-income securities. Simply put, they don't fall into traditional asset categories.There's a reason why alternative investments are more popular than ever before — but more on that later. Now let's take a closer look at the different types of alternative assets and how they differ from traditional investments. These financial instruments have been around in one form or another for centuries.
At the most basic, alternative investments are investments in asset classes other than equities, bonds or cash. They can play a part in strategies used to improve returns to investors when equity returns are low or negative, as well as to diversify investment risk profiles – reducing the potential negative impact of market shocks.
Among the most popular alternative investments are:
- Commodities– materials such as grains, metals, or basic materials
- Hedge funds –pooled funds that speculate using credit or borrowed capital
- Derivatives –futures or options contracts, including carbon credits and foreign exchange
- Collectables– fine art, wine, stamps, classic cars, coins, antiques, jewelry, or other tangible assets with strong fan-bases willing to pay a premium
- Real Estate– directly or through tax efficient pooled investments such as Real Estate Investment Trusts (REITS)
- Insurance risk– bonds linked to events that lead to insurance losses, such as natural disasters
The key characteristics of alternative investments
Alternative investments cover a wide range of assets and strategies. Generally speaking, however, they are characterized by:
- Low correlation to traditional investments like stocks and bonds
- Higher return potential than traditional investments
- More esoteric and oftentimes illiquid assets
- Longer lock-up of periods, meaning shares or interests may not be able to be redeemed/sold on a daily basis. This helps allow for exposure to less liquid assets
- Often complex investment structures and risk-return profiles
- Typically, higher minimum investment requirements
- Unique risk profile that should be understood prior to investing
