Alternative Asset Classes have become increasingly popular among investors as they seek to diversify their portfolios and reduce risk. An Alternative Asset Class is an investment that is outside of traditional options such as stocks, bonds, and cash. They are often sought after because they provide a tangible, low-correlated investment, which can result in differentiated returns from more typical asset classes. Alternative asset classes range from real estate, commodities, private equity, art, and collectibles, to hedge funds. Investing in alternative asset classes allows investors to achieve portfolio diversification and seek out returns that may not be available in more traditional investment markets. These types of assets have the potential for more significant returns compared to traditional major asset classes. They also have individual characteristics that may make them suitable for a particular investor based on their risk appetite and investment objectives. Therefore, alternative assets can be a useful way to meet investor needs, even in a low-interest-rate environment. With the right guidance, investors can navigate these investments and allocate their portfolios to achieve optimal functionality, growth, and risk balance.
Real Estate as an Alternative Asset Class
Real estate is one of the most popular alternative asset classes due to its ability to generate steady returns and appreciate in value over time. Investing in real estate can be a way to diversify an investment portfolio and provide a stable rental income stream. Here are some advantages of real estate investment:
- Diversification of portfolio
- Stable rental income stream
- Potential price appreciation
- Protection against inflation
- Investment in a tangible asset
There are several ways to invest in real estate as an alternative asset class, depending on the preference of the investor. The options can range from traditional rental properties to real estate investment trusts (REITs) and investment groups. Websites such as Fundrise and Roofstock offer platforms for investors to participate in real estate investment without the need for much start-up capital.
Is real estate an alternative asset class?
Yes, real estate is considered an alternative asset class. Alternative asset classes are typically those that are not traditional investments such as stocks or bonds. Real estate provides potential for long-term growth and diversification in a portfolio. Some benefits of investing in real estate as an alternative asset class include:
- Potential for rental income
- Inflation hedge
- Tax benefits
- Diversification
If you are interested in learning more about investing in real estate, there are various websites and products available that can help you get started. Some popular options include Fundrise, Roofstock, and Realty Mogul.
Commodities as an Alternative Asset Class
Commodities can be a valuable addition to a diversified investment portfolio given their low correlation with stocks and bonds. Several factors influence commodity prices, such as global supply and demand, political stability, and currency fluctuations. The following are some advantages of investing in commodities as an alternative asset class:
- Diversification of portfolio
- Potential protection against inflation
- Opportunity for returns from rising prices
- Low correlation with traditional asset classes
Here is a table summarizing the performance of some of the key commodities over the past five years:
| Commodity | Annualized Return (2016-2021) |
|---|---|
| Gold | 9.11% |
| Oil | -8.39% |
| Corn | -2.71% |
| Soybeans | 3.18% |
Potential investors in commodities should be aware of the unique risks associated with commodity investing, such as market volatility, geopolitical factors, and supply chain disruptions. Websites such as Commodity.com and Investopedia offer insights on commodity investing and the various investment options available.
Are commodities an alternative asset class?
Commodities are often considered an alternative asset class due to their low correlation with traditional asset classes such as stocks and bonds. Here are some key points to consider:
- Commodities are physical goods that are traded in markets around the world.
- Examples of commodities include gold, oil, corn, and soybeans.
- Commodity prices can be affected by factors such as weather, geopolitical events, and supply and demand.
- Investors can gain exposure to commodities through exchange-traded funds (ETFs), futures contracts, and mutual funds.
- Like other alternative assets, commodities can provide diversification benefits and potentially reduce portfolio volatility.
If you are interested in learning more about commodities and alternative assets, there are many resources available online including financial news websites like Bloomberg or specialized investment platforms like Masterworks, which allows individuals to invest in fractional shares of rare art.
Private Equity as an Alternative Asset Class
Private equity is a type of alternative investment that involves investing in the equity of private companies that are not listed on public exchanges. Here are some key factors to consider when investing in private equity as an alternative asset class:
- Higher potential returns compared to traditional asset classes
- Ability to participate in the growth of private companies
- Illiquidity, usually investors are locked in for a period of years
- Potentionally higher risk due to lack of public information and regulations
- Expertise and time needed to identify attractive opportunities
Private equity investments are best suited for investors with a higher risk tolerance and long-term investment horizon. Those interested in participating in private equity investments can do so directly or through a fund. Several websites, such as Pitchbook and Preqin, offer data and analysis on private equity markets and firms. Additionally, working with a financial advisor with expertise in private equity can help to identify opportunities that align with an investor’s goals and objectives.
What is private equity an alternative investment class and consists of?
Private equity is an alternative investment class that involves investing in private companies. It consists of a variety of investment strategies, which can include:
- Buyouts – purchasing a controlling stake in a company
- Venture capital – investing in early-stage companies with high growth potential
- Distressed debt – investing in companies that are in financial distress
- Mezzanine debt – providing financing to companies that don’t qualify for traditional bank loans
If you’re interested in learning more about private equity and alternative investments, you can check out websites such as Investopedia or the National Venture Capital Association.
Art and Collectibles as an Alternative Asset Class
Art and collectibles can provide diversification to a portfolio and have the potential to appreciate in value over time. However, there are several factors to consider before investing in this asset class:
- Highly subjective value appraisal – it can be difficult to accurately value an asset
- Illiquidity – costly and time-consuming to buy/sell
- Storage, insurance and maintenance costs may be significant
- Varied degree of risk – depends on the specific asset and its history
Nonetheless, it is possible to invest in art and collectibles through marketplaces such as Artsy and Artprice or through auction houses such as Christie’s and Sotheby’s. Investors interested in art and collectibles should conduct thorough research on the specific asset and the industry. Working with a specialist in the field can help to identify opportunities that align with an investor’s interests and budget.
Hedge Funds as an Alternative Asset Class
Hedge funds offer investors the ability to access a diverse range of investment strategies not available in traditional investments. There are several advantages and disadvantages to consider before investing in hedge funds:
- Higher fees – hedge funds typically come with higher management and performance fees
- Exposure to complex investment strategies not available in traditional investments
- Potential for high returns
- Concentration risk – some hedge funds have a concentrated portfolio to achieve higher returns, which can lead to higher volatility
- Limited availability – only accredited investors with high net worth are eligible to invest in hedge funds
- Transparency – hedge funds typically have less regulatory oversight and may provide limited transparency on their holdings
Investors can access hedge funds through specialty investment firms or online platforms. Some of the leading hedge fund platforms include Alphakinetic, FundSeeder, and SumZero. Investing in hedge funds requires a thorough understanding of the investment objectives and strategies of the fund. Working with a financial advisor or investment professional with expertise in alternative investments can help identify the right hedge fund opportunities.
Why are hedge funds considered alternative investments?
Hedge funds are considered alternative investments due to their unique characteristics and investment strategies. Unlike traditional investments such as stocks and bonds, hedge funds typically employ a variety of investment techniques, including leveraging, short selling, and derivatives trading, to generate returns for their investors. Other reasons why hedge funds may be considered alternative investments include:
- High minimum investment requirements, which restrict access to only high-net-worth individuals and institutional investors
- Less regulatory oversight compared to traditional investment options
- The ability to invest in non-traditional assets such as real estate, private equity, and commodities
For more information on alternative investments, visit websites such as Investopedia or consider using an investment platform like Fundrise which specializes in alternative investments.
Conclusion
While alternative asset classes can offer strong diversification benefits to a portfolio, there are risks to consider, and investors should invest in these assets after careful consideration and due diligence. It’s important to understand the characteristics of each unique investment type, such as private equity, real estate, commodities, art and collectibles, and hedge funds. Investors should weigh the risks and advantages of each investment, and understand how each asset class can complement their overall portfolio objectives. With that in mind, investors can work with financial advisors or investment professionals to determine the right asset allocation and investment strategies that fit their individual goals, risk profile, and cash flow objectives.
Including alternative asset classes in an investment portfolio can potentially offer significant diversification benefits, and open up opportunities for higher returns not available in traditional investment classes. Investors who are willing to put in the work and conduct thorough due diligence on each specific investment type may find that alternative asset classes offer strong diversification and unique investment opportunities that can bolster returns and mitigate risks.
