Simply put, alternative investments are assets that aren’t included in the conventional investment classifications. The conventional investment classifications include cash, stocks, and bonds. Alternative investment classifications include everything from private equity to hedge funds to real estate to commodities and art, to name just a few.
Interested in understanding about the specifics of alternative investments? Then keep on reading.
Types of Alternative Investments
Alternative investments come in many different forms. Below, we’re going to examine the basics of the most common alternative investments.
Private equity consists of funds used to finance private companies. If you want to invest in private equity, you’re advised to do so through a private equity firm.
These firms obtain funding from various clients, then give it to promising startups hoping they’ll have success. If they succeed, they will pay those who invested with dividends.
Direct investment is the process of directly investing money in a business. This form of investment requires no middle man, meaning that you’ll receive the entirety of the dividends owed to you. Note, however, that because businesses often fail, investing in them directly is perilous.
Real assets are essentially just items that contain some sort of monetary value. These items can include everything from baseball cards, jewelry, cars, oil, art, and more. Depending on the circumstances, investing in real assets can be either very risky or low-risk.
Hedge fundsare pooled funds that are invested in public equities. Those who invest in hedge funds give their money to a hedge fund manager. The manager will then invest in stocks and bonds, returning dividends to everyone who invested money.
Hedge funds are beneficial because they pay out often and because they’re capable of earning huge returns on investments. Note, however, that they’re exceedingly risky.
The Pros of Alternative Investments
While alternative investments have their downsides, they have quite a few advantages. We will review the most prominent advantages ofinvesting in alternativesbelow.
Can Reap Substantial Rewards
The primary reason investors invest in alternative investments is that they put said investors in a position to reap substantial rewards. Because these investments aren’t as popular as conventional investments, everyone who invests in them gets a bigger piece of the pie. Ergo, if the investment works, it works in a big way.
You know what they say about putting all of your eggs in one basket; you shouldn’t do it! Why? Because if your basket breaks, all of your eggs will break, and you’ll be left with nothing.
This applies to investment in the way of diversification. Diversification is an investment method in which an individual invests in several investments as opposed to just one or two. It reduces overall risk, ensuring that an investor doesn’t lose all of his or her money.
Now, how does this tie into alternative investments? See, a good deal of alternative investments inherently involve diversification.
Hedge funds and private equity, for instance, ensure that your money is being assigned to different investments. Because of this, your risk will be limited.
Can Have Some Unique Tax Benefits
Depending on the alternative investments you make, they could be subject to some tax benefits. Conversely, conventional investments do not come with tax investments.
Note, if you’re looking to take tax benefits, you should meet with a tax advisor or tax lawyer. The taxes associated with alternative investments can be complex, and therefore shouldn’t be handled by those who aren’t well-versed in tax law.
The Cons of Alternative Investments
Though their pros can be enticing, alternative investments have some cons that could turn you away from them entirely. The most notable of these cons include the following.
Are Expensive to Obtain
Simply put: any alternative investment worth pursuing is expensive to obtain. This is true whether you’re talking about hedge funds, or real estate, or gold, or otherwise.
The only ones who typically invest in alternative investments are those with substantial amounts of money. A typical hedge fund requires a minimum investment of $100,000. Some hedge funds require a minimum investment of $1 million.
For the vast majority of individuals, these types of investments are not feasible. That being said, there are some lower-cost opportunities out there.
Can Be Difficult to Sell
Another con of alternative investments is that they can be difficult to sell. This is in exact opposition to conventional investments, which can be sold at the drop of a hat.
When selling alternative investments such as gold or real estate, you must seek a specific buyer.
One of the biggest issues with alternative investments is that they’re largely unregulated. While the SEC pays them cursory attention, it doesn’t scrutinize them in the way that it scrutinizes conventional investments. Alternative investments are more vulnerable to fraud.
So, if you’re going to pursue an alternative investment, make sure it’s on the up and up. Failure to research your investment could cause you to lose a substantial amount of money.
Looking to Learn More About Investing?
Now that you’ve learned a bit about alternative investments, you might be looking to learn about other types of investing. If so, you’re in the right place. Vintage Value Investing has a bevy of investing information for you to utilize.