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Alternative Asset Investing


Summary

  • Alternative investments include hedge funds, private equity, venture capital, real assets, and collectibles
  • These investments are non-correlated and help diversify your portfolio

Introduction

Alternative asset investing sounds, well, alternative. In an ever-changing world is alternative investing the way to go? Some people think so. 

What are alternative assets?

Alternative investments are a category of investments that include hedge funds, private equity, venture capital, real assets, and collectibles. These typically require high minimum investments meaning that a lot of money is required to get into a lot of these investments. 

According to a study conducted by Columbia Management, an investment firm, adding assets with zero correlation to the market lowers your risk and increases your diversification. They find that, “adding just one zero-correlated asset to a portfolio reduces risk 29.5%, while adding a thousand 66% correlated assets reduces risk by only 19%. In short, correlation matters … a lot. One can make one correct and impactful portfolio choice, or a thousand fairly meaningless ones.”

What is alternative investing? 

Now that we know what alternative assets are- what is alternative investing? This means acquiring non-traditional investments. The traditional investments are typically bonds, stocks, and cash. An alternative asset doesn’t fall under the category of these traditional investments. They are typically held by high net worth individuals or institutions. There are different regulations and liquid capabilities with these types of assets. 

Why would someone want to acquire or own an alternative investment rather than traditional ones?

One of the main reasons is to diversify your portfolio. Alternative investments can bring great returns and since they are not typically tied to the markets they may perform better than traditional investments. If someone has a portfolio comprised of traditional investments and the economy takes a turn for the worst- so does the value of that portfolio. However, if someone is carrying an array of alternative investments they may not be in the same boat. The alternative investments are on their own playing field. Another reason to hold alternative investments is for tax benefits, or perhaps a hobby that someone has from collecting valuables. 

What are the pros and cons of alternative assets?

Pros Cons
  • Provides security in that it’s not dependent on market direction ie: downturn
  • Typically high upfront fees to get started
  • Brings diversification to a portfolio by adding to the traditional mutual funds and ETFs
  • Low liquidity 
  • Potential tax advantages ie: long term capital gains and pass through depreciation 
  • Average hold time can be anywhere from 10-25 years or longer
  • Inflation hedge
  • High fee structures compared to traditional stocks and ETFs
  • Ability to be passed down 
  • In terms of collectibles: risk of authenticity 
  • Hard to pinpoint value and price

Hard assets which are grouped into alternative assets are a great tool to hedge against inflation. Things such as real property, oil, and gold weaken the spending power of the dollar bill. Alternative assets are not always required to be registered with the SEC so it creates cause for treading lightly when dealing with these types of investments. 

Alternative assets can prove to be useful in building portfolio diversification. Due to the unverifiable performance data and high upfront costs, they may not suit every investor. 

Alternate Asset Investing

Quick Quiz

Review and answer these two questions to move on to the next section in the course.

Which one of these is not an example of an alternative investment?

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Why are alternative assets great to add to your portfolio?

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.