What Is Considered an Alternative Investment?

 

Alternative investment corresponds to asset classes beyond the realm of the common stocks, cash, or bonds. Several investment options fall under this category. It includes private equity, private debt, hedge funds, commodities, and real estate.  Alternative investments or simply alternatives have captured the interests of various professionals over the past few years.  Since the market has started to become volatile, investors now consider 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.

 

A Breakdown of What is Considered an Alternative Investment

 

Most alternatives come with high initial investment and a fee structure comparable with ETF (Exchange Traded Funds) and mutual funds.  It also comes with a minimized chance to publish demonstrable data and market it to prospected investors.  Most of what is considered an alternative investment also has low liquidity when compared to 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, making 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 risky due to the unregulated standards.

 

Types of Alternative Investment

 

We can categorize the types of alternative investments into two; traded and non-traded. 

 

Traded Investment

 

The traded type of alternatives can be liquidated.  BDC (Business Development Company) and REIT (Real Estate Investment Trusts) are considered traded alternatives.  Those traded alternatives can be bought and sold like bonds and stocks on the public exchange, which is a determining factor of what is considered an alternative investment.

 

Non-Traded 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 options, 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 real estate assets, 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.  However, remember that even though it offers a high return, it also incorporates various risks that you should consider.

Real Estate Funds as Alternative Investments

 

Real estate funds similar to REITS can be utilized when investors are diversifying an asset portfolio.  It is identical to a mutual fund solely focusing on investing in a public real-estate firm's securities.  The majority of these funds are being diverted into corporate and commercial properties. Yet, there are instances when the real estate funds are invested in alternative investments such as land, agricultural property, and multifamily investing such as apartments.  Sources of capital can be pensions, financial institutions, endowments, sovereign funds, wealthy private individuals, and fund of funds.

 

 

Pros of Real Estate Funds as Alternative Investments

 

 

·         Management Support- Real estate funds will provide the same level of benefit that they can have when they invest in a mutual fund.  They will be receiving the same amount of professional management support, particularly with their investment portfolio in these alternative investments.

 

·         Freedom to Invest- An investor has the privilege to invest his money in a fund wherein the management may or may not invest it in real estate.

 

·         Higher Yield-The funds invested in Multifamily Investing have a higher possibility of creating a higher passive income than the funds invested in equity.

 

Cons of Real Estate Funds as Alternative Investments

 

 

·         No Control/Insight as to which Investments the Money will be Used- The restrictions placed on the investors' participation is similar to those set in the private real estate investment firms.  The limitation in control instructs you to trust asset management blindly and hope that they will provide you with a return on investment.

 

·         Higher Fees-The charges associated with Multifamily Investing Funds are also higher compared with different alternative investing.  You may end up incurring higher expenses due to extra costs.

 

What is FOF (Fund of Funds)?

 

Funds are a financial pool consisting of different types of alternative investments (public or private funds) that are diverted in various investment strategies and types of assets.  The manager of funds is required to raise the necessary amount of financial pool, and they will also be in complete control of where to invest the fund, in what manner, style, and monetary instrument. 

 

Different strategies can accumulate the necessary fund; macro trends, arbitrage, distressed asset, and long/short equity.  It is different from private equity because they have better liquidity than other alternative investments such as private real investment firms and a much-improved redemption frequency.  With Funds, investors will be able to get their cash out a lot often.  With Fund of Funds, investors will achieve diversification when investing in different managers, asset classes, and strategies.

 

Investors who do not have billions allocated in other alternative investments are more inclined to use funds of funds.  They will instantly gain exposure to alternatives without developing any internal skills and capabilities to analyze funds in every asset class.