Alternative investments are not a part of the traditional investment categories like standard fixed-income securities, cash, bonds or stocks. As per Scott Tominaga, alternative investments encompass of an expansive variety of assets. It includes tangible assets like collectables and real estate, and even several complex financial instruments like hedge funds, private equity funds and cryptocurrencies.
Scott Tominaga provides a brief insight into a few popular types of alternative investments
One of the most important aspects that make alternative investments appealing is their potential to offer higher returns and improved diversification. These investments generally have a low correlation with traditional markets. This means that they are able to perform well even when stocks and bonds do not.
Here are some of the most popular types of alternative investments:
- Real estate investments: This includes not just residential and commercial properties and land, but also Real Estate Investment Trusts (REITs). REITs enable investors to invest in real estate without owning a property directly. Real estate investments are commonly considered a hedge against inflation. They have the capacity to provide steady income, but also tend to come with risks. Market conditions and interest rates have a huge role in the overall profitability and value of real estate investments.
- Private equity and venture capital: Private equity involves investing in private companies that are not listed on public stock exchanges. This type of investment is generally pursued by institutional and accredited investors due to the substantial capital required. Private equity firms pool money from discerning investors for the purpose of acquiring stakes in private companies. They do so to improve the performance of the company and sell it off eventually at a profit. Venture capital is a subset of private equity. It focuses on funding early-stage companies and startups. Such investments are risky in nature, but provide the potential for high returns if the company succeeds.
- Hedge funds: Hedge funds are a type of pooled investment funds that employ diverse types of strategies in order to earn active returns for discerning investors. Hedge funds are much less regulated than mutual funds. Hence, they are able to invest in a wide range of assets, including commodities, currencies and derivatives. Fund managers have a huge role to play in determining the success of hedge funds. They ideally capitalize on market opportunities by making use of strategies like long/short equity, and market neutrality.
As per Scott Tominaga, collectibles, and tangible assets like wine, antiques, and rare coins can also be considered to be a type of alternative investment. Such assets have intrinsic value and typically appreciate over time. Hence, they can be quite attractive to investors looking for something different from the traditional financial markets. Through alternative investments, investors typically gain access to opportunities that are not available in public markets, including private companies and niche markets. Tangible assets like real estate, precious metals and even collectibles may provide protection against inflation by maintaining or increasing in value over time. In recent years, cryptocurrencies led by Bitcoin have also gained significant attention as alternative investments.
