In today’s times, alternative investments can be considered any financial instrument excluding traditional asset classes like stocks, bonds, or cash-related instruments. There are many types of alternative investments like private equity (PE), venture capital (VC), hedge funds, real estate, commodities, and more. Historically, alternative investments looked a little different. Take a trip with us down the history of alternative investments.
The First Alternative Investment?
Many regard the first U.S. transcontinental railway, built between 1864 and 1869, as the first modern day alternative investment[1]. The railway was funded by private capital, as two companies came together to provide funding in conjunction with government bonds[2]. As this transaction fell outside the traditional investment asset classes, it has now been deemed an alternative investment, even though investors did not call it an alternative investment in those times.
However, trading and bartering had been going on for centuries before the U.S. transcontinental railroad, and there are historical records of commodity trading between 4500 BC and 4000 BC[3], tulip bulbs trading for as much as six times the average person’s annual salary in the 1600s[4], and the writings of Thomas Jefferson provided records of selling older vintages of wine at a premium dating as far back as 1787[5]. Baseball cards saw a golden era in 1909, with one featuring Honus Wagner selling for over $6M in 2021 due to its rarity[6]. Even from early civilization, alternative investments could be seen as ingrained in human nature.
Modern Day Alternative Investments
Alternative investments as we know them today were shaped in the 1900s. The first leveraged buyout occurred in 1901 when J.P. Morgan acquired the Carnegie Steel Company which merged with Federal Steel and National Tube to create U.S. Steel – the largest corporation in the world at the time[7].
MIT President Karl Compton co-founded one of the first venture capital firms in 1946: American Research and Development Corporation (ARDC). The ARDC was a public company which raised capital from universities, insurance companies, mutual funds, and investment trusts to make private market investments in companies leveraging technologies developed in World War II. An investment in Digital Equipment Company (DEC) in 1957 for $70,000 and 77% ownership helped increased the company’s value to $355 million over the next 14 years. This transaction helped set an example for potential returns from alternative investments[8].
Another early venture capital firm was J.H. Whitney & Company, also founded in 1946, which invested in entrepreneurs after World War II who were not able to secure funding from banks[9]. Both of these early venture capital firms helped shaped the industry into what we know it as today.
The first hedge fund was developed in 1949 by Alfred Winslow Jones, who has since been regarded as the “father of the hedge fund industry”[10]. His strategy was to create a “hedge” by shorting stocks that he believed would drop in value or use leverage on stocks he believed would increase in value. This strategy was novel at the time but influenced the foundational strategy for hedge funds today.
Alternative investments grew rapidly in the 1960s and early 1970s. The stock market crash of 1974 led to regulatory changes in the industry. The Employee Retirement Income Security Act (ERISA) was created and allowed pension funds to invest in other opportunities like alternatives. Private equity investments saw an influx of capital and leveraged buyouts boomed in the 1980s.
Alternative investments have continued to rise in popularity, and alternative assets under management reached $13.32 trillion at the end of 2021, and Preqin research estimates that number to grow to $23.21 trillion in 2026, as seen in the graph below.
Final Thoughts
Alternative investments have been seen all throughout history, ranging from railways, commodity trading, and baseball cards. While the specific types of alternative investments have shifted more towards private equity in modern times and look a little different from the earliest forms of alternative investments, there is a common thread between all alternative investments, historical and modern. Alternative investments have fallen outside the “norm” of traditional investing, such as stocks or bonds. This common thread has stayed consistent through history despite the individual investment opportunities changing to fit the current times. Alternatives are one way to diversify an investor’s portfolio and help mitigate risks.
To learn more about alternative investing, check out our recent blog, What is Alternative Investing?
Interested in seeing which private market alternative investments are available on MicroVentures? Log in to your account or Sign up for an account to view our current investment opportunities.
[1] https://assets.ctfassets.net/matahbe7799j/Uldabn9gxKx2CJ3tiZtpK/0aa2ea92987ff4a93b21397cae1dd9cd/CAISInfographic_EvolutionOfAlternatives_v3-2-.pdf
[2] https://ap.gilderlehrman.org/essays/financing-transcontinental-railroad
[3] https://analyzingalpha.com/commodity-market-history
[4] https://corporatefinanceinstitute.com/resources/economics/dutch-tulip-bulb-market-bubble/
[5] https://www.liv-ex.com/2018/09/fine-wine-market-past-present-future/
[6] https://allvintagecards.com/history-baseball-cards/
[7] https://www.cfo.com/banking-capital-markets/2000/01/deals-of-the-century/
[8] https://ventureforward.org/education/history-101/#:~:text=The%20first%20modern%20VC%20firm,Doriot.
[10] https://www.businessinsider.com/alfred-winslow-jones-started-the-first-hedge-fund-2016-8
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
