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.
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