Alternative Investment implies investing in assets other than the traditional methods such as stocks, bonds, cash, etc. These could be private equity, hedge funds, real estate, commodities, precious metals, wine, art, etc. These type of investments are held by high net worth individuals, or institutional investors. The addition of this type of investment to the portfolio allows diversification, reduces risks and enhances returns.
The performance of assets used in alternative investments is relatively lower when compared to those in the traditional methods. They are relatively more difficult to value. They are also less liquid when compared to traditional methods.
Some popular types of alternative investments being widely used are:
This can be defined as investing in private companies such as start-ups, venture capital, and financing throughout phases of the company’s growth. This investment is done in companies that do not issue public stocks. These firms raise funds through capital invested by institutional and non-institutional investors.
Direct Investment in Private Companies:
This implies investing in a start-up or a private company directly instead of the equity. This is a high risk and high return proposition.
This implies investing in physical assets which are of high value. Examples of such assets are precious metals, real estate, oil, wine, art, jewelry, etc.
In this case, funds are collected from a number of investors to form a common pool of funds. These funds are invested using different types of strategies to earn the return on investments. They have the advantage that they need less SEC regulations than other funds.
This is similar to Hedge funds where a common pool of investor’s funds is created. These funds are invested in various financial instruments such as commodities, currency and interest rate markets.
A financial derivative is an arrangement where the investor is promised a payment when a certain asset reaches a certain level. These securities include futures, options, forwards and swaps.
Fund of Funds:
This is a means of diversifying investments. It is achieved by investing in multiple managers, asset classes or strategies.
Private Placement Debt:
Investors can receive a steady cash flow by investing in a private company through promissory notes.
As the stock market becomes volatile and unpredictable, people are seeking safe investment methods. At such a time alternative investment schemes have come to a safe secure option to private investors. Therefore, they are becoming highly popular. However, they cannot replace traditional methods completely. They should be used to complement them. This will help to increase and diversify the investment portfolio and minimize the risks of investment.