‘Alternatives’ is an umbrella term that refers to non-traditional investments that aren’t stocks, bonds or cash.
Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals. This is because alternatives can be more complex, illiquid, unregulated and risky than stocks, bonds and cash.
However, a so-called ‘alternatives revolution’ is underway as technological advancements, a broadening range of financial products and increasing investor demand for strong returns are making alternative investments accessible to a wider range of investors. Our series of Trends Reports explores this in greater depth.
Types of alternative investment include:
- Private equity: Using the capital of investors, private equity firms invest in private companies and help them grow, providing expertise and strategic guidance as well as money. These firms typically acquire a controlling stake in the companies they invest in and work closely with management to improve their performance, so they grow in value.
- Private debt: Private debt involves providing a loan to a business, which the business should pay back with interest. Private debt is similar to private equity in that both fields involve investing in private businesses, but the two differ as private debt investors don’t actually own any of the business they’re investing in and merely provide a loan.
- Hedge funds: Hedge funds are actively managed investment funds whose managers use a wide range of strategies (and often take on considerable risk) to deliver strong returns for investors. Hedge funds are typically only accessible to accredited investors, such as high-net-worth individuals and institutional investors.
- Real estate: Real estate investments are investments in land and property. For example, an investor in real estate might buy a house with the goal of profiting from an increase in its value, wait a decade and then sell it for a profit.
- Commodities: Commodities are raw materials that are either consumed directly, such as food, or used as building blocks to create other products. Examples of commodities include oil, gold and wheat.
- Collectibles: Collectibles are items such as vintage cars, high-quality wines and fine paintings. While not what one would generally associate with the term ‘investment’ – which evokes stocks and bonds – buying a vintage car, waiting for it to appreciate in value, then selling it for a profit would constitute an investment in collectibles.