What Are Alternative Investments?

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You’re probably familiar with stocks and bonds when it comes to investing, but there’s a whole world of possibilities outside of these classic asset groups.

What are alternative investment?

A financial asset that does not fall into the traditional asset categories of stocks, bonds, or cash is known as an alternative investment.

Hedge funds and private equity, as well as venture capital and rare collectibles, are examples of alternative assets that allow investors to diversify their portfolios and pursue returns that are less connected with the stock market.

Private equity, venture capital, hedge funds, managed futures, and collectibles such as art and antiques are examples of alternative investments. Alternative investments include commodities and real estate, among others.

Who can buy alternative investment?

Historically, many types of alternative assets have been restricted to financially savvy investors such as institutions or high-net-worth individuals who have been designated as accredited investors by the Securities and Exchange Commission (SEC). This is because most alternative investments aren’t traded on public exchanges and aren’t regulated by the Securities and Exchange Commission.

You can become an accredited investor by having an annual income of $200,000—$300,000 for a couple—for the previous two years; maintaining a net worth of $1 million or more; or demonstrating “defined measures of professional knowledge, experience, or certifications” in the eyes of the Securities and Exchange Commission.

Types of alternative investments

Hedge Funds

Hedge funds are private, pooled investment funds that aim for high returns by employing a variety of hazardous investment tactics. They can invest members’ funds in a variety of assets, including publicly traded equities and derivatives, currencies, startups, and a variety of other assets.

Hedge funds are often structured as private investment partnerships, with a general partner in charge of portfolio management and investment choices. The only thing limiting that person’s options is the fund’s mandate.

Private Equity Funds

Private equity funds are pooled investment vehicles with the goal of acquiring majority ownership in private and public firms. They take an active role in managing their portfolio companies, providing intellectual and financial capital.

The purpose of a private equity fund buying an interest in a company is usually to restructure it and offer funds to help it develop faster. The fund makes money when it sells its ownership in a portfolio firm, either through an initial public offering (IPO) or by selling it to another company.

Venture Capital Funds

In exchange for stock, venture capital funds provide funding to potential startups. They, like private equity firms, may have a role in management and provide needed expertise.

Venture capitalists, on the other hand, are more likely to stay involved than private equity funds. They engage with the portfolio firm to track progress and release funding rounds once specified milestones are accomplished. A merger, acquisition, or initial public offering (IPO) allows them to exit the investment.

Funds of Funds

A fund of funds works similarly to a hedge fund, except instead of investing in individual stocks, bonds, or other assets, it invests in other hedge funds. Because hedge funds often have high minimum investment requirements, this strategy can help investors gain access.

Natural Resources

Commodities, farmland, and forests are examples of natural resources. Investing in commodities implies buying barrels of oil or trainloads of iron ore to produce other products for large corporations. Commodities can be purchased through derivatives such as futures and options by regular investors. Forests and farmland investments provide alternate income streams based on the sale of trees, wood, and agricultural commodity prices.

Real Estate

Real estate is the most accessible alternative investment, with many Americans already owning homes in this asset type. Buying real estate or investing in real estate funds is referred to as real estate investing. Real estate investors expect their investments to appreciate in value over time, while assets such as apartment complexes and shopping malls generate consistent rental revenue.

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