7 Common Alternative Investments That All Investors Should Know
Many investors seek investments beyond the traditional markets. Fixed income, stocks, and cash aren’t cutting it for the big players. They want exposure to alternative markets with two essential goals in mind:
– Enhancing investment returns
– Diversifying their portfolio
Some alternative investments like private equity have returns that yield way beyond public equity markets. Although investing in alternative markets usually requires time, many investors are constantly looking for profitable alternative markets.
Knowing which non-traditional investments are profitable will help you get a closer look at markets you may not know of yet. This article will list the seven most common alternative investments.
What is Private Equity
Private equity is the broadest alternative investment category. It refers to investing capital into private organizations and companies. It also refers to companies not listed on public exchanges.
Private equity comes in several essential subcategories:
– Venture capital (investing in start-ups and companies in their earliest stages)
– Buyouts (when the investor purchases a part of the company or the entire business)
– Growth Capital (helping mature companies restructure or expand their business)
The relationship between the investor and the company that receives the funding is critical for private equity. When it comes to alternative investment services, the investor usually gives more than just capital to their support company. They also provide other essential benefits like mentorship, industry expertise, etc.
What is Private Debt
Private debt is an investment that isn’t financed by a bank or traded on public markets. The term “private” doesn’t refer to the borrower as both private and public companies can benefit. Instead, it relates to the investment structure.
When a company needs additional funds to expand their business, they often leverage private debt. Investors typically profit in two ways: through loan repayment and interest payments.
What are Hedge Funds
Hedge funds are only available to institutional investors such as high-net-worth individuals, pension funds, mutual funds, etc.
They refer to employing different investing strategies and trading liquid assets. The main goal is to earn a high return on investment. Hedge fund investors and their managers usually specialize in various skills to utilize multiple investing strategies. They often use a market-neutral, quantitative method, long-short equity, and more.
What are Commodities
Investors have been trading commodities for thousands of years throughout history. The earliest commodities exchange goes back to the 16th century.
Since they aren’t dependent on public equity markets, commodities are a safe bet against inflation. Investing in commodities means investing in mostly natural resources and tangible assets. Natural gas, oil, gold, and agricultural products fall into the commodities category.
Instead of depending on the stock market, the value of commodities follows supply and demand. When a specific commodity is in high demand, its prices go up, and investors profit.
What are Collectibles
Investing in collectibles refers to buying and taking care of physical items and hoping their price will go up over time. Collectibles may include various things, from art pieces to historical objects.
Collectibles are the most fun alternative investment asset to invest in, but they are also very risky. The acquisition is usually very costly, and the investor has no dividends or other income until they sell the items. Moreover, properly storing collectibles is essential because destroyed assets won’t give you an investment return. Experience is a crucial skill every investor needs to tap into collectibles successfully. Only true experts thrive in the market and experience significant returns of investment.
What is Real Estate Investment
We can’t talk about the most common types of investment without mentioning real estate. It’s the most significant asset category in the entire world.
In addition to being a significant asset, it is also an exciting category for many investors. If you’re familiar with the way bonds function, you won’t have trouble understanding real estate investments.
The property owner receives constant cash flow from tenants living on the property and paying rent. However, the essential goal is to increase the value of the real estate in the long run, so equity plays a significant role, too.
Evaluating the property is a challenge in real estate. Valuation methods include various principles like ales comparable and income capitalization, and each method has its pros and cons. Successful real estate investors take their time to develop all the crucial valuation skills to quickly decide when and where to invest and which methods to use.
What are Structured Products
Complex and often risky, structured products are relatively new to the investment playfield. They usually include working with fixed income markets like corporate or government bonds. Good examples of structured products include collateralized debt obligations and assets whose value comes from a group of stocks and bonds.
Structured products usually offer the investor a mix of products that perfectly fit the investor’s needs and plans. Investment banks typically create structured products and submit them to investors, retail investors, or hedge funds.