Top Alternative Types & Inspiring Examples You Need to Explore!

Alternative investments are assets that step outside the conventional realm of financial instruments like stocks, bonds, and cash. They encompass a diverse array of options including hedge funds, real estate, private equity, private debt, precious metals, collectibles like fine wine or art, stamps, and even the burgeoning world of cryptocurrency.

Historically, alternative investments have primarily been the playground of high net worth individuals. However, as time marches on, these investment avenues are becoming more accessible to the everyday investor. More and more people are integrating alternative investments into their portfolios. Research indicates that the alternative investments sector could surpass a staggering $14 trillion in assets under management by 2023, marking a remarkable 59% increase since the end of 2017.

Diversification is key for investors, allowing them to spread risk across various asset types. Alternative investments are a smart way to achieve this diversification. They typically exhibit low correlation with traditional assets, acting as a buffer against the fluctuations of stocks and bonds.

While alternative investments can potentially yield higher returns than their mainstream counterparts, they often come with hefty purchase costs and lower liquidity. Therefore, embarking on an investment strategy that includes these assets requires a unique skill set, market knowledge, and a solid risk tolerance.

Types of Alternative Investments

Alternative investments can be categorized into two main groups: tangible and intangible. Both offer a wealth of opportunities, from private equity and private debt to derivatives and collectibles. Let’s explore some of the most common types of alternative investments.

Intangible Alternative Investments

Intangible investments lack a physical form but hold significant monetary value. Here are some prevalent types:

• Private Equity: This involves investing in private companies or public firms aiming to go private. Strategies include Venture Capital for startups, Leveraged Buyouts for established companies, and Growth Equity for expansion opportunities.
• Hedge Funds: These funds utilize a variety of strategies to achieve high returns. Depending on the manager’s approach, they might engage in long-short equity, arbitrage, or quantitative strategies. Hedge funds primarily attract high net worth individuals and institutional investors.

Tangible Alternative Investments

Tangible investments have a physical presence you can see and touch. Here are the most common types:

• Real Assets: This category includes real estate, land (like farmlands or timberland), utilities, and infrastructure. Real estate stands out as the largest asset class, with opportunities available through real estate investment trusts (REITs) or private investments.
• Commodities: Involving investments in physical goods or the producers of these resources, commodities may include precious metals, oil, gas, and agricultural products. They serve as a hedge against inflation, with typical strategies involving derivatives.
• Collectibles: These are tangible items acquired with the expectation that their value will appreciate over time, such as rare wines, vintage cars, and sports memorabilia.

Best Alternative Investments

Here are some of the top alternative investments worth considering:

• Peer-to-Peer Lending: This innovative investment method enables individuals to pool their funds to lend to other individuals, facilitated by various P2P platforms.
• Real Estate: Residential and commercial properties offer substantial investment opportunities. For many, investing in REITs provides a less hands-on alternative while still generating cash flow from rentals.
• Cryptocurrency: The rise of digital currencies like Bitcoin and Ethereum has revolutionized investment strategies. They offer high potential returns, albeit with significant price volatility.
• Gold: From gold coins to mutual funds, investing in gold serves as a traditional hedge against inflation and economic uncertainty.
• Equity Crowdfunding: This model allows you to invest in startups and small businesses, potentially reaping hefty rewards if they succeed.
• Collectibles: Unique items like fine art, luxury watches, and rare sneakers present exciting investment opportunities for those looking to diversify creatively.

Examples of Alternative Investments

Let’s dive into a couple of scenarios that showcase how alternative investments can be strategically utilized:

Example #1

Meet Emma, who is keen to shield her assets from inflation and stock market instability. After consulting a trusted financial adviser, she decides to allocate 10% of her portfolio towards commodities like gold, oil, and REITs, stepping away from conventional assets.

Example #2

John is fascinated by the booming Venture Capital scene and sees potential in investing in early-stage companies. He wants to maximize his returns while enjoying tax benefits, so he commits 8% of his portfolio to the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), both of which offer attractive tax reliefs.

Alternative Investing vs. ETF Investing

While alternative investments can be enticing, they aren’t for everyone. High minimum investments, increased fees, and lower liquidity compared to traditional assets can pose challenges. Moreover, the lack of regulation makes alternative investments susceptible to fraud.

Enter exchange-traded funds (ETFs)—a compelling middle ground. ETF investing offers exposure to alternative assets without locking investors in long-term. They can be bought and sold like stocks, offering convenient liquidity. For instance, investors can engage with ETFs that track the performance of various alternative indices, allowing them a diversified approach without the complexities of direct investment.

Why ETFs are a Smart Alternative

Exchange-traded funds (ETFs) pool investors’ resources to buy a mix of securities and assets, including alternative assets like gold, cryptocurrency, and private equity. This structure allows individuals to indirectly own slices of these assets through shares traded on exchanges.

Investing in ETFs emerges as a savvy choice for various reasons:

• Diversification: ETFs offer a similar diversification benefit as traditional portfolios, allowing investors to spread their risk across sectors and asset types.
• Liquidity: Unlike many alternative investments, ETFs can be traded throughout the day, giving investors the flexibility to enter and exit positions freely.
• Cost-Effectiveness: ETFs often have lower expense ratios compared to mutual funds, making them a more affordable option for investors.
• Simplicity: The straightforward nature of ETFs makes them easier to understand than complex alternative investments, lowering the barriers to entry for new investors.

How to Get Started in Alternative Investing

One of the most effective pathways into alternative investing is through ETFs. They provide a seamless way to dive into this exciting realm without the burdensome complexities and high costs associated with direct investments. However, successful ETF investing still requires knowledge and careful planning.

To maximize your success in ETF investing, consider these crucial factors:

• Understand Your Investments: Know the index the ETF tracks, its history, and structure. Recognizing whether an ETF is actively or passively managed can impact your strategy.
• Watch the Expense Ratio: Higher expense ratios can erode your capital gains. Favor ETFs with lower expense ratios for better profitability.
• Align with Your Goals: Tailor your selection of ETFs to your investment profile, goals, time horizon, and risk tolerance to ensure a well-rounded portfolio.

In summary, alternative investments offer exciting avenues for diversification, but they come with their own set of risks, such as illiquidity and high capital requirements. For beginners and seasoned investors alike, ETF investing represents a practical and balanced approach, marrying the benefits of both traditional and alternative investment strategies.