What Are Alternative Investments? Diversify Your Portfolio

Summary: Alternative investments are financial assets not categorized as any of the traditional investment categories, such as stocks and bonds. In this guide, we’re exploring different types of alternative investments, covering their pros and cons, and seeing where you can invest in them.

Alternative investments: Definition

Unlike traditional investments, alternative assets are known for their intricate nature, lack of regulation by bodies such as the US Securities and Exchange Commission (SEC), and lower liquidity levels. Moreover, some assets, such as hedge funds, have substantially higher minimum investment requirements. As such, they tend to attract corporate investors and those who are ready to invest more significant amounts.

Further, alternative investment returns are measured compared to a benchmark –– for example, the Hedonova fund is gauged against the S&P 500 index –– and independently of market movements. The relationship between returns of different investments is measured in terms of correlation, ranging from -1 (completely uncorrelated) to +1 (completely correlated). 

Different assets see different correlation levels. Real estate and hedge funds, for example, tend to exhibit a lower correlation to traditional asset classes. Some platforms use leverages and shorting to manage correlations. The correlation between alternatives and traditional assets, of course, fluctuates during business cycles. 

Types of alternative investments

Alternative assets are numerous, offering investors a chance to explore a large number of sectors and go really narrow with their investments. The most common alternative investments include:

• Real estate: Physical properties or Real Estate Investment Trust (REIT) are among the most widely bought alternative assets. This category also includes real estate crowdfunding and real estate mutual funds, and it’s ideal for those looking for a stable cash flow and passive income over a long time horizon. Farmland, on the other hand, blends real estate and commodities, offering investors all the benefits of physical land and the potential for passive income from farm operations;

• Commodities: Popular commodities include precious metals like gold and silver, agricultural assets such as cattle and rice, as well as other tangible goods with industrial uses and consistent demand. Gold, for example, is one of the oldest hedges against inflation and enjoys high industrial use;

• Art and items of sentimental value: Investments in art pieces and memorabilia can be highly profitable, as they often have historical and sentimental value;

• Cryptocurrencies: Digital currencies naturally fall outside traditional stocks and bonds. They are a new and relatively risky asset class, but they do have a high return potential;

• Private equities: Investing in private equities means investing in private companies or start-ups not listed on any stock exchange. 

How and where to invest in alternative investments 

Getting started with alternative investments can go many ways. The initial step will vary significantly depending on what kind of asset you’re looking to invest in. Some require substantial starting capital and extensive research; others require a trading account at an investment platform and a few minutes of your time. 

If you’re looking to diversify quickly and invest in a broader range of assets, you might wish to explore pre-built hedge funds, such as Hedonova. As of January 2024, Hedonova’s portfolio comprises the following assets:

• 20% Equipment Finance;
• 19% Litigation Finance;
• 13% Real Estate;
• 12% Startups;
• 11% Carbon Credit;
• 8% Cash;
• 7% Music Royalty;
• 6% Agronomy;
• 4% Art.

The fund also incorporates currency derivatives as a hedge against Forex risk. Some investments are also structured as derivatives, synthetic calls, or put options to boost tax efficiency and minimize downside risks.

Alternative investments in the future

The overall market for alternative investments is expected to reach $17.2 trillion by 2025, according to NASDAQ. 

This kind of growth might indicate that more and more investors are looking for something else besides stocks and bonds. However, we must also consider factors such as cryptocurrencies, which have positioned themselves as one of the fastest-growing alternative assets. 

There is also equity crowdfunding. That is, individual investors can now purchase shares of new companies on various investment platforms. Sure, such investments are risky, as crypto attracts scammers, and new equity companies can easily fail. But the growing interest worldwide is indisputable, and there are enough to make this option attractive for even small investors.  

Pros and cons of alternative investments

Pros

• Diversification: Alternative assets are numerous. As such, they come with a high diversification potential and allow investors to gain exposure to a number of markets without a lot of previous experience;
• Hedging: Since they are not so dependent on the stock market, alternative assets can be a hedge against inflation;
• High return potential: They might be a bit riskier than stocks and bonds, but alternative assets also offer higher return potential than their traditional counterparts;
• Specialty investments: By investing in alternative assets, you can target a very narrow niche;
• Hands-off investments: Investing in something like hedge funds means you can gain exposure to, for example, the wine market without any experience managing and owning actual wine.

Cons

• Low liquidity: Selling some alternative assets is much more difficult than selling shares in companies;
• Prices: Alternative assets often incur higher fees and a lot of investment platforms impose rather high minimum entries;
• Risk: High return potential necessarily implies more risk and volatility;
• Regulation and transparency: Alternative assets are often less regulated by, for example, stocks.

Wrap-Up

While alternative investments tend to be less liquid than their traditional counterparts, they offer the benefits of diversification and the potential for higher returns. Of course, higher returns come at a price — higher risks, steeper entry points, and a less regulated investing environment. But nonetheless, alternative assets keep attracting investors, especially those looking for a way to gain exposure to as broad a range of sectors as possible and those with higher capital.

To explore the alternative investment landscape, investors have a lot of options at their disposal — real estate, commodities, art, collectibles, wine, and so on — which allows for more niche and more precise investing. However, alternative investments also comprise equities and hedge funds, such as Hedonova, which are crafted around miscellaneous assets and managed by professional investors, removing the need for the investor to micromanage their portfolio and ensuring they can have a stake in diverse markets without prior experience and hands-on knowledge.

As such, alternative investments remain an attractive alternative for those willing and able to venture beyond conventional financial instruments.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

FAQs about alternative investments