Alternative investments are financial assets that do not fall into the conventional investment categories of stocks, bonds, or cash. These investments are often illiquid, unregulated, and carry a higher degree of risk. They can include a wide range of assets such as private equity, hedge funds, real estate, commodities, and collectibles like art and antiques12.
- Characteristics of Alternative Investments:
- Alternative investments typically have a low correlation with traditional investments, making them a valuable tool for portfolio diversification5.
- They often involve higher fees compared to traditional investments, with a management fee of 2% and a performance fee of 20% being common5.
- Liquidity is generally lower for alternative investments, making them less accessible for quick cash conversions24.
- Minimum investment requirements can be substantial, limiting access to smaller investors35.
- Types of Alternative Investments:
- Private Equity: Investing in private companies or real estate13.
- Hedge Funds: Using various strategies such as market neutral, merger arbitrage, convertible bond arbitrage, and macro and CTA strategies93.
- Real Estate: Direct investment in physical properties or property based securities13.
- Commodities: Investing in goods like oil, gold, or agricultural products36.
- Collectibles: Art, antiques, wine, and other rare items34.
- Risks and Considerations:
- Operational, financial, counterparty, and liquidity risks are key considerations for investors in alternative investments9.
- Due diligence is crucial before investing in these complex assets9.
- The value of alternative investments can be hard to determine due to their rarity and lack of regulation14.
- Benefits and Use in Portfolios:
- Alternative investments can provide higher returns and help smooth out overall portfolio returns by reducing correlation with traditional investments27.
- They can be a core part of an investor's portfolio to reduce risk and maximize value over the longer term2.
- Regulatory Environment and Accessibility:
- Alternative investments are often less regulated than traditional investments2.
- Retail investors are increasingly able to access alternative investments, although high-net-worth individuals and institutional investors still dominate23.
- Growth and Trends:
- The alternative investment industry is expected to grow significantly, with a projected increase of 59% by 20232.
- BlackRock and other asset managers offer alternative solutions to investors10.
In conclusion, alternative investments offer a way to diversify and potentially increase returns by reducing correlation with traditional investments. However, they also come with higher risks and complexities, requiring careful consideration and due diligence from investors.