How to Invest in Alternative Assets

What are Alternative Assets?

Typically, when the average individual thinks about investing they tend to focus on the stock market, but there is an entirely different side of investing many never explore. These assets are known as alternative investments or alternative assets, which can offer investors all the same benefits and returns as traditional assets, and then some.

Alternative assets are investment avenues that fall outside of the typical stocks, bonds, mutual funds, and ETFs (exchange-traded funds). They range from venture capital and hedge funds to private equity funds, precious metals, collectibles, art, wine, and much more. Investors search for alternative assets to add more diversification to their portfolio, as well as income generation, and the possibility of higher returns.

Alternative assets look attractive in volatile markets when traditional asset classes are struggling. However, alternative investments aren’t for everybody. Many are unregulated and limited to high-net-worth individuals. Others require some level of expertise, or at least interest and willingness to learn.

Three types of alternative investment funds that might be familiar are private equity, venture capital, as well as hedge funds. Let's dive into each one to better understand how you can use them in your own investing.

Private equity involves investing in private companies outside of the public stock market. This type of investing is typically reserved for accredited investors and institutional investment firms. Private equity investing has the potential for higher returns but investors are exposed to increased risk and long lock-up periods. Private equity investments are long-term, with investor money often held in the fund for as long as ten years. The money becomes available again after a sale of holdings, initial public offering, or merger.
Venture capital supports new companies as they work to commercialize their innovations. Investors are exposed to higher risk, but venture capital holds more potential for greater returns than more traditional investing. Similar to private equity, the funds are locked until an event like an acquisition or IPO. Money is collected from limited partner investors in increments as needed, which is referred to as “capital calls.”
Hedge funds typically trade on the public markets but employ short-selling, leverage, and other strategies that most investors don’t have access to. Hedge funds are also typically limited to high-net-worth individuals and entities that are designated as accredited investors or qualified purchasers.

Geopolitical risks have traditionally had more impact on bonds, equities, and mainstream commodities like oil than on alternative investments like fine wines, watches, or digital currencies. In a world where uncertainty outweighs stability, it’s no surprise that more investors are looking to alternative investments for diversification and market outperformance.

Investors interested in alternative assets are wise to be prepared for risk, however. Case in point: cryptocurrencies, which are another one of the alternative investments examples on the market. Considered a digital asset rather than a real currency, cryptocurrency was breaking records in 2021. The cryptocurrency market hit a peak in November 2022, but just 7 months later had lost nearly $2 trillion in value. It’s a cautionary investing tale, but some investors are willing to take the risk.

Ultimately, alternative investments can offer opportunities and advantages, especially as part of a long-term strategy and particularly in volatile markets. However, they are not without their disadvantages. These investments can also be fairly illiquid, unlike stocks, meaning selling them is not as easy to transact.

For this reason, as well as others, those interested in pursuing investing in alternative assets should educate themselves on them before entering the market. In this article, we plan to help you scratch the surface of this side of investing to help you better understand the alternative side of investing and see if they're right for you.

Why Would You Invest in Alternative Assets?

There are many benefits to investing in alternative assets that investors should come to understand in order to branch out investment knowledge, as well as strategies to boost portfolio returns. Alternative investments can offer diversification, boost returns, and generate income. Thanks to interest rate hikes, recession fears, and other uncertainties, alternative asset classes are part of many investors’ investing strategies.

Most investors who are already investing in alternative assets plan to continue investing in them, with 96% of people allocating investments anticipating they will either increase (55%) or maintain (41%) their exposure to alternatives over the next three years.

Alternative assets are key to many diversification and income-generation strategies. Because alternative investments don’t correlate with the stock market, they can help to limit volatility. In many cases, alternative investments can even offer a higher return, especially with markets in flux. Higher returns are possible in part because alternative investments have additional tools that traditional securities don’t, such as leverage, derivatives, and short selling.

Alternative investments offer other benefits including a greater sense of anonymity, flexibility, protection against inflation and market crash, and an opportunity for investors to use and finesse expertise about specific investments (precious metals, for example).

For investors interested in the nontraditional—and who are open to more risk and have the means to explore them—alternative assets can be an excellent complement to traditional investments in a diversified portfolio.

How to Invest in Alternative Assets

Investors interested in alternative assets can travel the world to collect pieces of art, engage in venture capital opportunities, or look for investments in the commodities market with investments like gold. However, those can not only be expensive, but expose investors to risk.

Risk is something that you cannot avoid as an investor, but that shouldn't deter those who are interested in diversifying their holdings from exploring their many options.

Investors interested in alternative assets seek many things, such as income generation or diversification as a strategy. Now, your search has never been easier as investors can search for the various types of alternative investments on Magnifi. There you will find funds that provide exposure to these opportunities:

References:

“The Rise of Alternative Investments: How Central Bank Stimulus has Forced a Rethink,” August 5, 2020, Nasdaq, https://www.nasdaq.com/articles/the-rise-of-alternative-investments%3A-how-central-bank-stimulus-has-forced-a-rethink-2020
Daniel, Will, "The crypto market has now lost $2 trillion in value. Here are 5 shocking facts from crypto’s Black Monday," Yahoo Finance, 13 June 2022, https://www.yahoo.com/video/crypto-market-now-lost-2-220636668.html
“Survey: Limited Partners, Asset Allocators Plan to Increase Alternatives Allocation, Spend More on Fintech and Embrace Automation In 2023,” November 9, 2022, Businesswire.com, https://www.businesswire.com/news/home/20221109005312/en/Survey-Limited-Partners-Asset-Allocators-Plan-to-Increase-Alternatives-Allocation-Spend-More-on-Fintech-and-Embrace-Automation-In-2023

Disclosures:

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.