Alternative investments: what are they? Types and opportunities

Alternative investments help diversify traditional portfolios of stocks and bonds. With yields under pressure, interest rates at more accommodative levels, and inflation lurking, traditional markets struggle to provide certainty. Alternative investments can potentially help protect against losses or increase returns.

This is why, in more challenging environments, curiosity—and real interest—in alternative investments is growing. But what does "alternative" really mean when we talk about investments? And what are the real off-the-beaten-path opportunities today?

What are alternative investments?

Alternative investments are, simply put, anything that doesn’t fit into traditional channels like stocks, bonds, or mutual funds. They operate outside the stock market and often involve the real economy: they don’t follow the movements of financial markets, but depend on concrete projects, private companies, or tangible assets. This is also why they are considered less conventional and, in many cases, riskier, but at the same time capable of offering more attractive return opportunities.

Over the years, the meaning of "alternative" has increasingly broadened. Today, it includes private equity, venture capital, private debt, infrastructure, and raw materials, but also digital assets like crypto-tokens. In addition to these, alternative investments also include art, fine wines, vintage cars, or music rights.

What unites such diverse worlds is a series of common traits: low liquidity, longer timeframes for reviewing invested capital, greater management complexity, and, in many cases, a more streamlined regulatory framework. All of this increases risk exposure, but it is precisely in this space that potential returns arise that are difficult to achieve with traditional markets.

When it comes to alternative investments, there is no single definition: the spectrum is broad and constantly evolving. Today, alongside historic pillars like private equity or hedge funds, innovative forms such as asset tokenization or real estate crowdfunding are gaining ground. Here are the main categories.

Private Equity

Private equity invests in companies not listed on the stock exchange. These are typically mature businesses that require capital to grow, innovate, or restructure. The investors are pension funds, insurance companies, or large private fortunes, who invest through dedicated funds capable of pooling resources and managing them with a medium- to long-term perspective. After a slowdown in 2024, the sector returned to growth in 2025 thanks to falling interest rates and is now looking with interest at Italian SMEs, which are solid but still undervalued.

Let’s quickly summarize the structure of private equity funds:

|Limited Partners|General Partners|Compensation Structure|
|Institutionals and high-net-worth individuals who invest in these funds.|Those responsible for managing the fund’s investments.|General partners receive management fees and a share of investment profits. These fees range between 8% and 30%.

To evaluate private equity performance, the IRR (internal rate of return) is generally used, but it has some limitations. The IRR does not include the reinvestment element for interim or negative cash flows. Therefore, a modified IRR has been developed, a more practical and generalized measurement tool used to quantify private equity performance today.

Venture capital

While private equity focuses on established companies, venture capital focuses on high-potential startups. Risks are high here, as many businesses fail in the early years, but returns can be exceptional if successful. The investment horizon is typically 3-7 years, and the expected return on investment is typically 8x-10x greater than the invested capital. This high rate of return is a natural result of the risk quotient associated with the investment.

It is a key driver of innovation and for sectors such as technology, biotech, and artificial intelligence.

Private debt

Private debt represents loans to unlisted companies as an alternative to bank credit. It has grown significantly since the post-2023 credit crunch, offering attractive returns (7-12%), but with risks related to lack of transparency and limited access to the issuing companies’ financial information.

Hedge funds

Hedge funds are among the most discussed alternative instruments because they aim to make profits even when markets decline. To do so, they use sophisticated leverage: short selling, derivatives, and borrowed capital. Today, they manage over $4.7 trillion in assets under management (AUM), approximately 40% of the entire alternative market, and are primarily aimed at large and institutional investors. Unlike mutual funds, they have fewer regulatory constraints and can operate across a much broader range of assets. For this reason, on the one hand, they offer good coverage against price volatility, but on the other, they require advanced skills and a high risk tolerance.

Real Estate Funds

They allow you to invest in real estate without directly purchasing a property. Through dedicated vehicles, real estate funds raise capital from multiple investors for residential or commercial projects, offering diversification and professional management.

Real Estate Crowdfunding and Peer-to-Peer Lending

Digital platforms such as Re-Lender or Housers allow you to finance real estate projects or businesses even with small amounts of capital, starting from just a few dozen euros. These are accessible but risky instruments: transparency isn’t always guaranteed, and defaults can erode returns, especially in a context of falling interest rates.

Real and Collectible Assets

Art, wine, luxury watches, vintage cars, and collectibles are tangible assets that combine financial value and personal passion. In recent years, they have also attracted young investors: suffice it to say that fine watches have returned an average of 12% annually over the last five years. Vintage Classic Cars such as the 1950 Ferrari 166 Inter Vignale Coupé and the Ferrari 250 GTO Berlinetta top the list, while investment-grade wines such as Bordeaux follow closely behind. Coins, Artwork, and Stamps follow closely behind.
The downside is low liquidity and the risk of counterfeits and low authenticity.

Exotic Commodities

In addition to gold and precious metals, always considered safe havens, interest is growing in unusual commodities such as collectible whiskey, saffron, or tropical timber. They have offered notable performances in the past, but the markets remain niche, illiquid, and subject to high storage costs.

Cryptocurrencies and Tokenization

Bitcoin will again surpass $100,000 in 2025, but the real revolution is tokenization: real estate, works of art, or financial instruments transformed into digital tokens tradable on blockchain. The potential is enormous, but regulation (MiCA first and foremost) is struggling to keep pace.

Infrastructure Funds and the Green Economy

Investing in infrastructure (energy networks, transportation, renewables) means investing in long-term stability and growth. These instruments are closely linked to the energy transition and sustainability, which are increasingly central to global political and economic agendas.

Thematic ETFs

Alongside traditional funds, thematic ETFs linked to specific commodities or alternative markets are growing. These passively managed instruments allow for diversification even with small amounts of capital, while remaining exposed to the volatility of the relevant sector.

Why focus on alternative investments

It’s natural to ask: if they are complex, illiquid, and risky, why include them in a portfolio? The answer lies in the benefits they can offer. After the 2008 crisis, when even the most conservative portfolios were subjected to the stress of volatility, alternative investments began to gain attention. Not so much as a substitute for traditional asset classes, but as a piece of the puzzle that can provide balance when markets are wobbly.

Their strength lies primarily in the fact that they don’t always move in sync with stocks and bonds: they often follow different paths and, in doing so, are able to cushion the effects of sudden shocks. In other words, they act as a buffer that makes overall performance less exposed to price fluctuations.

Added to this is active management. It requires more skills, more work, and inevitably higher costs, but it offers the possibility of seizing opportunities that passive investing cannot tap. This is why alternatives have always held a certain allure for institutional investors and high net worth individuals, but in recent years they have also begun to attract the attention of those seeking less conventional options, more closely tied to the real economy.

The Risks of Alternative Investments

So much variety, so much potential, but also so many risks.

• Limited Liquidity: Exiting an alternative investment can take months, if not years.
• Subjective Valuations: It’s difficult to establish a fair price for a fine wine or a piece of music.
• Weak Regulation: In some sectors (such as real estate tokenization), the regulatory framework is still uncertain.
• Tax Complexity: Each asset has specific taxation, often unclear for retail investors.

Original article published on Money.it Italy. Original title: Investimenti alternativi, cosa sono? Tipologie e opportunità