This article examines the different types of alternative investments and explores the growing number of options. In 2024, investors can sift through many opportunities for alternative investments to secure and grow their wealth.
What are Alternative Investments?
Alternative investments are non-traditional ways to invest money and are generally considered to be those beyond stocks, bonds, and cash. They include real estate, cryptocurrencies, private equity, and commodities. These investments have different risks and potential returns than traditional investments, thus offering opportunities for diversification and potentially higher rewards. Morever, they encompass a wide range of assets that often exhibit low correlation with traditional markets, and can potentially mitigate overall portfolio risk.
Understanding Alternative Investments
Traditional investment options like stocks and bonds are prone to market volatility and economic downturns. On the other hand, alternative investments have unique characteristics that complement conventional investment strategies and offer several benefits. Since there is a low correlation with traditional markets, their performance might not be heavily influenced by fluctuations in stocks and bonds. Therefore, they provide a hedge against market downturns, reducing overall portfolio volatility. Diversifying across various asset classes can help stabilise investment returns over time.
Alternative investments also have the potential to deliver higher returns than traditional assets. Examples include private equity, venture capital, and specific types of real estate investments, which may yield substantial profits over the long term, especially in sectors with promising growth prospects. Moreover, alternative assets can hedge against inflation and currency devaluation. Tangible assets like real estate and commodities tend to maintain their value during periods of economic uncertainty, protecting against the erosion of purchasing power.
Lastly, alternative investments provide opportunities for accessing unique markets and strategies that may not be available through traditional investment channels. For instance, investing in emerging markets or niche industries can offer exposure to sectors with significant growth potential and help diversify risk across various market segments.
According to The Motley Fool, alternative investment assets managed amounted to $13.7 trillion in 2021 and are projected to increase to $23.3 trillion by 2027, based on data provided by investment firm Preqin. The adoption of alternative investments tends to be higher among affluent investors, with 69% of ultra-high-net-worth individuals (those with assets valued at $5 million or more) including alternative assets in their portfolios, compared to 45% of "mass affluent" investors (those with assets ranging from $250,000 to $1 million), according to a survey conducted among EY clients. Notably, private equity emerges as the only alternative investment consistently outperforming the S&P 500.
Exploring Alternative Asset Classes
We’ve compiled a selection of the most sought-after alternative investments for our readers below:
Real Estate and Property Investments
Real estate investments involve acquiring physical properties such as residential homes, commercial buildings, and land parcels. Investors can generate income through rental payments, property appreciation, and development projects. Real estate investment trusts (REITs) offer a way to invest in real estate without direct ownership, providing liquidity and diversification benefits to investors.
Digital Assets and Cryptocurrencies
Cryptocurrencies like Bitcoin and Ethereum have disrupted traditional finance with their decentralised nature and blockchain technology. Investors view them as a hedge against fiat currency devaluation and as speculative assets with potential for substantial returns. However, they come with high volatility and regulatory uncertainty, requiring careful consideration and risk management.
Private Equity and Venture Capital
Private equity investments involve acquiring equity stakes in privately held companies, often with the aim of facilitating growth, operational improvements, or restructuring. Venture capital focuses on early-stage startups with high growth potential, offering funding and strategic support in exchange for equity ownership. Both asset classes provide exposure to innovation, entrepreneurship, and non-public markets, but they entail illiquidity and higher risk compared to publicly traded securities.
Commodities and Tangible Assets
Commodities encompass raw materials such as precious metals, energy resources, and agricultural products. Investing in commodities provides diversification benefits and serves as a hedge against inflation and currency fluctuations. Tangible assets like gold, silver, and oil have intrinsic value and historical relevance as stores of wealth, making them attractive to investors seeking portfolio protection and asset preservation.
Other Alternatives: Collectibles, Peer-to-Peer Lending, Structured Products, and Farmland
Collectibles such as art, antiques, wine, and rare coins offer tangible assets with aesthetic appeal and potential for appreciation over time. Peer-to-peer lending platforms facilitate direct lending between individuals and businesses, bypassing traditional financial intermediaries and offering attractive interest rates to investors. Farmland and timberland investments provide exposure to agricultural and natural resources, benefiting from global population growth and increasing demand for food and sustainable materials.
Conclusion
Alternative investments have seen significant growth in recent decades, providing investors with a broad range of options that go beyond the typical choices of stocks, bonds, and cash. Alternative investments represent a range of asset classes, including real estate, cryptocurrencies, private equity, and commodities, offering unique opportunities for diversification, higher returns, and protection against market volatility. By understanding the features and benefits of these alternative assets, investors can incorporate them into their portfolios strategically, manage risks, pursue growth, and safeguard their wealth in an evolving financial environment. As these investments continue to morph, it is necessary to stay informed and adaptable to tackle the complexities and benefit from the opportunities presented by alternative investments.
We will be examining each of these asset classes. Watch here for more details!
