Alternative investing provides access to unique opportunities that may not be available in traditional financial markets, such as investing in startups or emerging markets. Some alternative assets can serve as a hedge against inflation, as their prices typically rise during inflationary periods. Other alternative assets may have high potential for returns, especially in the long term. So what do you need to know about them?
Understanding alternative investing
Alternative investing refers to investing in an asset that is not a stock, bond, or cash. Such investments are typically illiquid, meaning they cannot be easily and quickly sold or converted into cash. Alternative investments are sometimes referred to as alternative assets.
Previously, investing in alternative assets was limited to wealthy and institutional investors, but now this type of investment is becoming increasingly widespread and popular. Nowadays, retail and individual investors are increasingly using alternative investments to diversify their investment portfolios.
10 most popular types of alternative investing
- Real Estate
- Private Equity
- Hedge Funds
- Commodities
- Infrastructure
- Private Debt
- Venture Capital
- Distressed Debt
- Art and Collectibles
- Cryptocurrencies and Digital Assets
Real estate
Alt investing in real estate refers to investment strategies in real estate assets that deviate from traditional methods, such as direct property ownership or real estate investment trusts (REITs). These alternative strategies may involve crowdfunding platforms, peer-to-peer lending, real estate syndication, or investing in real estate through private equity funds.
Alternative investing in private equity
It involves investing in companies that are not publicly traded on stock exchanges. Private equity firms typically invest in privately held companies with the aim of increasing their value over time and eventually selling them for a profit.
Hedge funds
Alt investing in hedge funds involves allocating capital to investment funds that employ a wide range of strategies beyond traditional long-only equity or fixed-income investments. Hedge funds typically aim to generate positive returns regardless of market conditions by using strategies such as long-short equity, event-driven, global macro, and relative value, among others.
Alternative investing in commodities
It involves allocating capital to assets such as physical commodities, commodity futures contracts, commodity-related equities, or commodity-focused funds. Commodities can include natural resources like gold, silver, oil, agricultural products, and other raw materials.
Alt investing in infrastructure
It involves allocating capital to assets related to the development, operation, and maintenance of essential physical structures and facilities. Such as transportation systems, energy production and distribution networks, telecommunications networks, water and sewage systems. It also includes social infrastructure like schools and hospitals.
Private debt
Private debt refers to loans or debt securities issued by companies that are not traded on public markets. Before investing in private debt, it’s important for investors to conduct thorough due diligence, assess the risks involved, and consider factors such as credit quality, liquidity, and the overall economic environment. Additionally, investors should be aware of regulatory considerations and potential tax implications associated with private debt investments.
Alternative investing in venture capital
It offers investors the opportunity to participate in the growth and success of early-stage companies with high growth potential. Essentially, this is investing in startups. Investors first choose a promising startup, evaluate the success of future investment by various criteria, invest in exchange for a stake in the company, and also provide valuable advice in managing the startup.
Alternative investing in distressed debt
Investing in distressed debt can offer the potential for high returns, as distressed securities are often priced below their intrinsic value due to the distressed nature of the issuing companies. However, distressed debt investing also carries significant risks, including the potential for loss of principal, bankruptcy, and illiquidity.
Art and Collectibles
Investors can directly purchase individual artworks or collectible items, such as paintings, sculptures, rare coins, stamps, or vintage cars, with the intention of holding them as investments. The value of art and collectibles can appreciate over time due to factors such as rarity, historical significance, artistic merit, and demand from collectors.
Alternative investing in cryptocurrencies and digital assets
Investors can purchase cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and others from cryptocurrency exchanges. By owning cryptocurrencies, investors can benefit from potential price appreciation and participate in the growth of the crypto market.
Knowledge needed for investing in alternative assets
Investing in alternative assets requires understanding that they typically carry higher levels of risk compared to traditional assets. This may include financial risk, liquidity risk, low transparency risk, and others. Additionally, knowledge of portfolio management can be useful for effectively allocating capital among different alternative assets and reducing overall portfolio risk. Skills in research and analysis will also be beneficial to assess the potential opportunities and risks of alternative assets. Smart and efficient portfolio risk management will help preserve capital and achieve maximum results in the long term.
Analytics
What alternative asset is the easiest to invest in?
Investing in cryptocurrency is likely the simplest way to invest in alternative assets. It’s quite easy to buy and sell, making it a highly liquid asset. The buying process is also relatively straightforward. All you need to do is register a cryptocurrency wallet or create an account on a cryptocurrency exchange, such as Binance. The next step would be purchasing a coin or token. To choose an asset that has the potential to multiply in value, even by tens or hundreds of times, you need to conduct fundamental analysis. This involves learning about who issued the coin, in which country, what the coin is backed by, and other aspects regarding the coin. You also need to pay attention to the asset’s market capitalization — it’s best to select an asset with a low market cap, as coins and tokens have a lot of room to grow. This is the most challenging part.
Which of the alternative assets is the riskiest?
Among the riskiest alternative assets, I would include investing in cryptocurrencies as well as investing in startups. Investing in cryptocurrency is risky due to the lack of transparency and excessive volatility in the market. Today, a coin may cost, for example, $100, but tomorrow it could be $0.01 or completely disappeared. Moreover, it is quite difficult to find out whether the coin is actually backed by funds, or perhaps there are none left. The Luna coin provided a vivid example.
When it comes to investing in startups, it is indeed one of the riskiest assets because the highest percentage of investments do not succeed. Even the most promising startup does not always live up to expectations.
What alternative asset should I invest in to protect myself from inflation?
No asset guarantees complete protection against inflation. However, I would highlight several assets that are less likely to be affected by inflation. These include investing in real estate, in real assets such as land, forests, fields, and commodities. Another good option is precious metals. Alternative investing in infrastructure, such as roads, power plants, bridges, and others, can also protect against inflation. All of these assets tend to increase in value during inflation, so inflation has little impact on them. Another interesting option for inflation protection is investing in small-cap companies, as they can simply raise prices for their products during inflation.
Which alternative asset is the least risky to invest in?
The least risky investment is alternative investing in real estate because by investing in real estate you become its owner or co-owner. Of course, there may be cases where natural disasters or military actions can cause the loss of the property. Also, insufficient due diligence during the purchase process can lead to subjective mistakes. It is worth noting that real estate investment can be done through investment companies, which will take care of all the work but will charge a commission for their services. In most cases, this area of investment is the least risky.