Understanding Alternative Investments

Alternative investments are investments in financial assets, which do not fall under the conventional category of assets, such as cash, bonds, or stocks.

Alternative investments are investments in financial assets, which do not fall under the conventional category of assets, such as cash, bonds, or stocks.

This means that alternative investments include various forms of assets, such as precious stones, precious metals, antiques, art, and financial assets.

Financial assets include commodities, real estate, private equity, exchange funds, hedge funds, carbon credits, film production, venture capital, cryptocurrencies, and financial derivatives. Forestry, shipping and real estate Investments are also known as alternative investments.

Over the years, alternative finance has grown to accommodate new channels for alternative investments. These channels include; venture capital, equity crowdfunding, private equity, and art, amongst others.

Most alternative Investments assets are in the hands of institutional investors, as a result of their lack of regulation, their complex nature and high level of risk.

Alternative investments are usually unregulated by the SEC, and they tend to be somewhat illiquid. This means that due to a low number of buyers, investors may find it difficult to sell alternative assets.

It may also be difficult for them to value alternative investments, since the assets and their transactions are rare in the finance world. This makes alternative investments quite prone to fraud and investment scams, due to their unregulated nature.

In comparison to exchange-traded funds (ETFS) and mutual funds, a large number of alternative investments have high minimum investments and fee structures. They also have more limited opportunity to advertise to potential investors, and to publish verifiable performance data.

As a result of lower turnover, transaction costs for alternative Investments are usually lower, despite the likely high initial minimums and upfront investment fees.

Although alternative investments are often subjected to some form of legal structure, yet this structure is not as clear as conventional investments. This is why it is essential for investors to conduct extensive and diligent research when taking such investment assets into consideration for their investment portfolios.

Usually only accredited investors have access to alternative investments. Non-accredited retail investors also have access to alternative investments by means of alternative mutual funds and exchange-traded funds.

The advantages of alternative investments include; high rewards, counterweight to conventional assets, portfolio diversification, and inflation hedge. The disadvantages of alternative investments are illiquidity, difficulty in valuation, high risks, and unregulated assets.

Consequently, when trying to determine whether to invest in the stock market or in cryptocurrencies for example, your criteria for selection should bear in mind the complexity involved, the difficulty in making trades especially for the everyday investor, as well as the risk involved.

That said, alternative investments could do your investment portfolio a world of good in uncertain periods as these.

Written by Lawretta Egba.