Alternative investment corresponds to the classes of asset that is beyond the realm of the common stocks, cash or bonds. A lot of investment options fall under this category which includes private equity, private debt, hedge funds, commodities, real estate, and crypto. Alternative investments or simply, alternatives as they are otherwise known, have captured the interests of various professionals over the past few years. Since the market has started to become more volatile, investors are now considering the assets that are minimally affected by the daily pricing of the market. Let us find out what is considered an alternative investment in this industry.
Most of the alternatives come with high initial investment and a fee structure that is comparable with ETF (Exchange Traded Funds) and mutual funds. It also comes with a minimized chance to publish a valid data and market it to prospected investors. Most of what is considered an alternative investment also has low liquidity when compared to the traditional assets. For instance, the investor will find it challenging to sell a 90-year old wine bottle because of the limited amount of interested parties and possible buyers.
The transaction involved with the alternative investment is also unique which makes it difficult for the investors to value their investment. For instance, if there is a seller of a rare and valuable gold coin, it may be challenging for him to determine the actual value of his investment. Most of what is considered an alternative investment is highly at risk with fraud due to the unregulated standards. We have seen a perfect example of this with the high numbers of scams which were associated with crypto fund raises. This was largely on part due to a severe lack of due diligence performed by services providers and scammers taking full advantage of the hype associated with the segment.
The types of alternative investments can be categorized into two; traded and the non-traded. The traded variety of alternatives can be liquidated. BDC (Business Development Company) and REIT (Real Estate Investment Trusts are both considered as traded alternatives. Those traded alternatives can be bought and sold like bonds and stocks on the public exchange which is a determining factor on what is considered an alternative investment.
On the other hand, non-traded alternatives do not have any secondary market. These types of investments are only accessible to a prospected investor through a financial advisor. These are some of the reasons why most of the non-traded alternatives are illiquid.
On what is considered an alternative investment that falls under the non-traded alternatives, the non-traded BDC and REIT are some of them. The REIT that cannot be traded is invested in the real estate itself or the assets of real estate while the non-traded BDC is invested in the debt or the equity of a private company. Both of these types provide diversification for a long-term investment of a particular investment collection.
The general types of what is considered an alternative investment provide an excellent opportunity for the investors which may not be available for the general public and the retail investors. But remember that even though it offers a high return, they also incorporate various risks that you should consider.