ALTERNATIVE INVESTMENT: TYPES AND EXAMPLES

Alternative Investment
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Renowned investors understand that diversifying investment portfolios is one of the best ways to accumulate wealth and also protect oneself in the event of downturns. That’s why heavy investors invest in alternative investments, knowing they offer more benefits than conventional investments. Although there are more risks involved in this, investors can entrust their alternative investment fund to a professional manager or platform. A good investment requires adequate information, and that’s what this guide tends to provide. Let’s get on to what alternative investments are, their examples, and some of the best platforms that will manage your fund.

Overview

One might think that the name “alternative investments” refers to just another investment possibility or portfolio. On the contrary, these are real financial assets, but they do not belong to the same category as traditional investments. Are they real? Yes. Do they yield good returns? Of course, but then, every financial investment has its regulations as well as risks. However, if you can learn the rules of the game or possibly find someone who does, then you are good to go. In most cases, the second option is preferable. So, finding someone who understands the rules of the game or a platform that does will save you a whole lot of stress. Investment is all about risk, and if it will yield more returns, it’s worth a trial.

What Is an Alternative Investment?

Alternative investments are assets that do not fall under the purview of the traditional, or rather conventional, investment portfolio. By the way, “traditional” doesn’t mean they are vague or unrewarding. It simply means they are more secure, and these are your stocks, cash, or bonds. Real estate, commodities, private equity, antiques, art, venture capital, derivatives contracts, hedge funds, and managed futures are some of the assets that fall under this category.

Alternative investments are managed actively. This simply means the manager of an alternative investment fund may have the freedom to use derivatives and leverage or simply to employ any technique that works even if it requires taking short positions.

The manager of an alternative investment fund is free to choose what he thinks works because fewer regulations are guiding its operations. The U.S. Securities and Exchange Commission (SEC) tends to relax its rules for alternative investment funds.

How Alternative Investment Fund Work

Alternative investments mostly have higher entry requirements and initial investment fees, however, the asset class typically has lower transaction costs than traditional investments as a result of its low turnover. If you are more of a liquid investor, then you have to stay clear of alternative investment funds because they have low liquidity, although real estate tends to dispute that. There is less of a chance for these investments to advertise themselves or publish believable performance data for potential investors to see. And this is because they are not transparent or have a solid historical background.

Moreover, given the rarity of alternative investments and the transactions that involve them, valuing them can be challenging for investors. This explains why one of its distinguishing features is the fund manager’s narrow perspective. 

Alternative investments are usually held by institutions or people with a lot of money and good credit because they are hard to understand, have few rules, and are high risk.

Primary Features of Alternative Invest Fund

  • There is less oversight and disclosure than with more conventional investments.
  • Higher fees
  • Most are fairly illiquid
  • Redemption limits, lockup, or gates
  • These investments are often less liquid than traditional ones.
  • Special fiscal and legal implications
  • Depends on the investment managers’ narrow view
  • Poor availability of past risk and return information
  • Highly specialized holdings
  • It can provide steady returns even with downturns

What Are The Pros Of Alternative Investment Fund?

Here are a few of the many benefits associated with non-conventional investment strategies:

  • High rewards
  • Portfolio diversification
  • Counterweight to conventional assets
  • Inflation hedge

What Are Some of The Cons Alternative Investment Fund?

Some of the drawbacks of Alternative investments portfolio include the following:

  • High-risk
  • Illiquid
  • Difficult to value
  • Fewer regulatory requirements

How Can One Access Alternative Investment?

The following are the primary ways investors can access alternative investment funds;

  • Co-investment in a fund’s portfolio company.
  • Direct investment in a business or project (such as infrastructure or real estate)
  • Investing in a fund (such as a PE fund)

Alternative Investments Platform

When it comes to investments, nothing undermines the power of diversification. That’s why even the experts will advise against putting all your eggs in one basket. Thus, individuals with the fund are willing to invest in alternative investment funds. Investors can only rely on the manager’s skill because there are no clear rules or even a track record of performance. Here’s a little advice, if you do not understand how alternative investment funds work, entrust your fund to a professional platform. Their expertise and ability to speculate in favorable conditions will help secure your investment. These platforms take care of the analysis, and you can rest assured your funds are in safe hands. The following are some of the best alternative investment platforms in the state;

#1. Gatsby

If you are an investor looking for a variety of real estate investment opportunities, including fix-and-flips, renovations, new construction, and both short- and long-term rentals, then Gatsby is a good alternative investment platform to check out. Founded in 2016, Gatsby Investment is a one-stop shop for accredited investors seeking yielding residential and commercial real estate.   

The good thing about investing in Gatsby is that once you meet the minimum investment threshold of $10,000, you have nothing to worry about. The company is the only one responsible for fixing up and maintaining these buildings, meeting the needs of tenants, making sure everyone has a good time, and making a profit once investors pool their money.

#2. Propel(x)

Investors seeking alternative investments platform can also go for Propel(x). Propel(x) made it to our list because their investment opportunities are carefully selected, easy to access, and span numerous sectors. This alternative investment platform connects venture capitalists with new businesses. Like Gatsby, this also has a minimum investment threshold of $10,000. Propel(x) made it to our list of alternative investment platforms because their investment opportunities are carefully selected, easy to access, and span numerous sectors. Moreover, investors are required to pay a 2% platform fee for joining the platform but, considering the fact you’ll be gaining access to a wide variety of products, businesses, and ideas to invest in, it’s fair enough. If you wish to get in with less than $10,000, then you’ll have to join a syndicate. Syndicates have a minimum investment threshold of $5,000 and a platform fee of 7.5%.

#3. EquityBee

Next on our list of alternative investment platforms is EquityBee. Investors can gain exposure to promising new businesses through EquityBee, while startups and innovative businesses can expand their reach by connecting with retail investors there too. So it’s a win-win situation for everyone involved. With this platform, investors can easily diversify their portfolios, gain access to companies that have not yet gone public, or even make their first private investment. Although it has a minimum investment threshold of $10,000, it made it to this list because it offers opportunities for investors as well as their workers. 

The system gives workers a way to put their stock options back into the company and share in the company’s future growth by putting money into their stock portfolios. 

#4. Arrived Homes

Arrived Homes is a great t alternative investment platform for investors with an interest in real estate. With Arrived Homes, even non-accredited investors have access to shares in the company’s carefully selected rental properties. 

The platform makes it easy for anyone to invest, irrespective of their financial strength, with a minimum threshold of $100. With as little as $100, you can invest. Investors can also cash in on their properties’ quarterly dividends while they wait for an appreciation in value. 

#5. Public.com

Public.com is one platform that proves the value of collectibles. Yes, aside from real estate, and stocks, you can invest in collectibles and art with this platform. The platform allows investors to research the specifics of each asset they’re considering before they buy, and then monitor its performance to see how their money is growing. 

They also provide a sizable learning center where you can find information on various alternative assets and how they can benefit your portfolio. 

Examples of Alternative Investments

Alternative investment exists in several vehicles. Below are some examples of alternative investments;

#1. Real Estate

Oftentimes, people wonder why real estate is one of the examples of alternative investments, knowing that people are familiar with it. It doesn’t change anything; real estate is what it is—an alternative investment option too. Real estate refers to anything from an underground tunnel to a house, a mall, a city block, or even a condo. It can be a commercial or residential property and one of the most active alternative investment portfolio

Understanding Real Estate As An Alternative Investment

When people invest in real estate, it’s because they intend to get something from it. Most of the time, money can be made from real estate investments through rental income, property value growth, and, less often, royalties from minerals or oil found on your land. If you have financial prowess, real estate is one of the best examples of alternative investments. However, people who can’t afford the buy a property can switch to REITs. 

#2. Private Equity

Aside from real estate, private equity is one of the best examples of alternative investments. The term “private equity” (PE) refers to the investment capital provided by high-net-worth individuals (HNWI) and companies that buy into private companies or take public companies private and delist them from stock exchanges.

We can also say private equity is the practice of funneling money into privately owned businesses or partnerships to make a profit through either long-term investment in the company’s growth or short-term reorganization.

When it comes to investing in private equity funds, small investors typically don’t stand a chance. Private equity is a financial model wherein investors pool their resources to acquire or invest in privately held or niche businesses. By doing so, general partners can influence management and other business decisions to boost profits and ultimately the company’s value for a sale. one of its primary features is that it’s not publicly traded.

Understanding Private Equity Alternative Investment

You’ll likely see private equity firms aim to be available whenever a target company is in a position to receive an infusion of capital, which can happen several times throughout its lifetime. Simply put, it’s buying out a company, taking over its ownership, and rebranding or restructuring the company. Of course, acquiring a company costs a fortune, and like other examples of alternative investment, it’s not that affordable. Things are changing now too, making it possible for investors to venture into private equity alternative investment through a pooled fund that invests in a hedge or mutual funds and exchange-traded funds (ETFs

That puts the instrument out of reach for most folks, although there are now options for more standard earners, like funds of funds—pooled funds that invest in a hedge or mutual funds and ETFs that track privately traded companies. Both have much lower minimum investment amounts. The world of crowdfunding has also dropped investment minimums in private deals.

#3. Collectibles

Ever heard of the Saint-Gaudens Double Eagle $20 gold coin? I heard only 13 exist and only one can be legally owned. Well, I don’t even know what it looks like, but yeah, that’s a good example of what a collectible is. If you happen to have an 80-year-old old wine right in your cellar, that too can pass as a collectible. Here’s the thing, whenever you hear collectibles, the list is endless but they center on antiques. Collectibles are physical possessions that you take pleasure in and, ideally, will increase in value over time. Compare to real estate and private equity, people may prefer the others to it but it’s still one of the examples of alternative investments.

Understanding Collectibles

Depending on the value of the collectible, it can serve as collateral if you need a loan. Collectibles are rare and valuable items the worth of them depends on their age and scarcity, the thoroughness of a collection, or the care taken to maintain their authenticity. 

Also, there is no official methodology to evaluate the market price or transparency in pricing because collectibles are not traded on public exchanges. This means there are no regulations and finding a buyer who places the same value on the items as you do, may not be that easy. So the seller doesn’t know when they appreciate or depreciate in time.

#3. Derivatives

Derivatives are usually between two or more people and this contract is based on the expectation of a change in the value of an underlying asset. Regarding alternative investment funds, derivatives are perfect portfolios for hedging, pure speculation, or leverage. Here’s the good thing about derivatives, it’s a win-win situation. If the situation arises in your favor, holders can allow the contract to expire and then sell at the new price. If the rice falls, they can use the contract to protect themselves. 

Understanding Derivatives As An Alternative Investment

 The primary rule of derivatives is speculation. The same principles applied to both investors and minor businessmen. Because of the psychological distance between them and the underlying asset, derivatives are highly susceptible to market sentiment, which often causes them to fluctuate in ways that have nothing to do with the underlying asset’s value. This alternative investment also tends to be very liquid because of the uncertainties surrounding the 

#5. Commodities

The last on our list of alternative investment examples are commodities. Commodities are widely used as a hedge against inflation because they tend to move in the opposite direction of paper assets (the stock and bond markets).

Generally, commodities are marketable physical goods that include both manufactured goods and raw materials. Items such as grains, oil, gold, beef, and natural gas are examples of commodities that one can either own outright or have a stake in. 

When the price of a commodity increases, a rightful owner can decide to sell it off whereas investors who own shares of that commodity will benefit. 

Understanding Commodity Alternative Investment

Commodity prices are sensitive to changes in supply and demand, so they tend to fluctuate a lot. Remember, this market doesn’t have valid regulations backed by the SEC, so investors prefer to trade futures contracts that way, they protect themselves. As always, commodities as an alternative investment are not for newbies or anyone who wants a more secure investment plan.

Is Crypto an Alternative Investment?

Yes, it is. Aside from real estate, derivatives, collectibles, private equity, and so on, cryptocurrency is another example of alternative investment. Adding cryptocurrency investments to your diversified portfolio is a good idea although it has some regulation backing it, it’s still a highly risky, highly speculative investment option. Bitcoin, the first cryptocurrency, was developed in 2008. The ones that came after are sometimes referred to as “alt” coins. 

What Is The Best Alternative Investment? 

Here are some of the best alternative investments for every investor;

  • Real estate
  • Private Equity
  • Collectibles
  • Cryptocurrency
  • Hedge fund investing

Conclusion

Although there are no strong regulations for alternative investments, it’s still a great way to accumulate wealth over time. However, you must remember they are quite different from stocks and bonds; hence, there’s a need to seek professional help to ensure you make the right decision.

FAQs on Alternative Investment

Why Do Investors Invest In Alternative Investments?

Alternative investments are appealing to some investors because they have a low correlation with the conventional market. This means they retain their value during a market downturn. Moreover, they are effective inflation hedges. 

What are the 4 main categories of alternative investments?

Hedge funds, private capital, natural resources, and real estate.

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References

  • www.benzinga.com
  • www.businessinsider.com
  • www.cfainstitute.org
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