What is alternative investment

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 antiques.

1. Characteristics of Alternative Investments:
   • Alternative investments typically have a low correlation with traditional investments, making them a valuable tool for portfolio diversification.
   • They often involve higher fees compared to traditional investments, with a management fee of 2% and a performance fee of 20% being common.
   • Liquidity is generally lower for alternative investments, making them less accessible for quick cash conversions.
   • Minimum investment requirements can be substantial, limiting access to smaller investors.
2. Types of Alternative Investments:
   • Private Equity: Investing in private companies or real estate.
   • Hedge Funds: Using various strategies such as market neutral, merger arbitrage, convertible bond arbitrage, and macro and CTA strategies.
   • Real Estate: Direct investment in physical properties or property based securities.
   • Commodities: Investing in goods like oil, gold, or agricultural products.
   • Collectibles: Art, antiques, wine, and other rare items.
3. Risks and Considerations:
   • Operational, financial, counterparty, and liquidity risks are key considerations for investors in alternative investments.
   • Due diligence is crucial before investing in these complex assets.
   • The value of alternative investments can be hard to determine due to their rarity and lack of regulation.
4. Benefits and Use in Portfolios:
   • Alternative investments can provide higher returns and help smooth out overall portfolio returns by reducing correlation with traditional investments.
   • They can be a core part of an investor's portfolio to reduce risk and maximize value over the longer term.
5. Regulatory Environment and Accessibility:
   • Alternative investments are often less regulated than traditional investments.
   • Retail investors are increasingly able to access alternative investments, although high-net-worth individuals and institutional investors still dominate.
6. Growth and Trends:
   • The alternative investment industry is expected to grow significantly, with a projected increase of 59% by 2023.
   • BlackRock and other asset managers offer alternative solutions to investors.

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.