Alternative Investments Definition
Alternative investments refer to financial assets that do not come under the conventional investment categories such as stocks, bonds and cash. They include investments in tangible assets, such as real estate, fine art, antiques, or financial assets such as commodities, private equity, hedge funds, venture capital, cryptocurrencies, and derivatives contracts.
Alternative Investments Key Points
- Alternative investments fall outside the traditional categories of cash, stocks, and bonds.
- They encompass a wide range of assets from real estate and commodities to cryptocurrencies and venture capital.
- These investments typically carry a higher degree of risk and are less liquid than traditional investments, but they can also provide higher returns.
- Alternative investments are typically used by investors for diversification and hedging purposes.
What are Alternative Investments?
Alternative investments refer to a range of asset classes that diverge from the traditional risk-return characteristics of stocks, bonds, and cash. These investments have unique and varying degrees of risk, return and liquidity objectives differing from traditional investments and are usually held by institutional investors or accredited, high-net-worth individuals.
Why Alternative Investments?
Investors use alternative investments to diversify their portfolios, minimize the impact of market volatility and improve returns, because they generally react different to conventional market movements. Whilst alternative investments can bolster portfolio performance, they generally carry higher fees and are less liquid than traditional investments, making them most appropriate for long-term, patient investors.
Who uses Alternative Investments?
Alternative investments are usually used by institutional investors or high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk. These types of investments require the investor to commit a significant amount of capital and be prone to potentially high-risk scenarios.
When to use Alternative Investments?
Alternative investments should be considered for long-term investment strategy, and most efficient when used as hedging mechanisms during periods of economic uncertainty or market volatility. Because these investments often lack liquidity, investors should be prepared to hold onto these assets for an extended period.
How do Alternative Investments work?
Alternative investments work by delivering returns that are uncorrelated to traditional asset classes, thereby providing diversification benefits. For example, if stocks are performing poorly, a real estate investment might still provide a return. However, alternative investments can be volatile, less liquid, and harder to value, factors that can increase investment risk.
