We’re Shedding Light on the World of Alternative Investing

When building your investment portfolio, having a healthy balance of different types of investments is key. Depending on your financial situation and portfolio goals, alternative assets are one type of investment option that could help you diversify your portfolio. But what is alternative investing, and what types of assets are available for this investment strategy? MicroVentures is sharing more information on this topic below.

What Is Alternative Investing?

Alternative investing refers to the practice of making investments in assets that are not part of traditional asset classes. Traditional asset classes include stocks, bonds, ETFs, and mutual funds, while broadly speaking the alternative assets class can be defined to include many types of investments such as private equity (PE), venture capital (VC), hedge funds, real estate, artwork and collectibles, cryptocurrencies, intellectual property, commodities, film, and more.

Each traditional asset class can be further categorized by variables that include, but are not limited to, market capitalization, geography, industry, and market development. Apple common stock, for instance, is generally considered a large-cap domestic value stock of a company based in a developed market. While this can add more nuance to the difference between the two, overall alternative assets are any type of investment that falls outside of the traditional asset types we mentioned above.

Types of Alternative Investing

Real Estate

Whether residential or commercial, real estate is a unique asset class. Residential real estate can manifest in the form of purchasing homes to put on the rental market, or “house flipping” where the investor purchases, renovates, and re-sells a house at a higher value. Commercial real estate is another option for investors, such as leasing a property to a business. Purchasing a large, multi-family unit, such as an apartment complex, is also considered to be a commercial real estate investment. While house-flipping typically seeks capital appreciation (buying the asset low, holding while making improvements or waiting for the market to mature, and then selling for a profit), the goal of real estate investments that involve purchasing and then leasing out commercial or residential property is generally regular cash flow in excess of what it costs to own and maintain the property.

Startups

Startup investing has been characterized by many as “high-risk, high-reward”. While traditional methods of investing in well-established, profitable companies are considered lower risk investment opportunities, investing in startups has the potential to provide far greater returns than an investor may typically find within the stock market.

The JOBS Act, passed in 2012, paved the way to bring startup investing to the masses. Equity Crowdfunding opened investment in non-publicly traded companies to non-accredited individuals, those who do not meet certain income and net worth requirements outlined by the SEC. With startup investing accessible by many, it can be an intriguing asset class that has the possibility to provide a high return, but not without equally high risk and illiquidity.

NFTs

Non-Fungible Tokens (NFTs) have emerged as a new asset class for investors within the blockchain and cryptocurrency market. NFTs are cryptographic assets, like digital works of art or goods, with built-in digital authentication supported by blockchain technology. NFTs are non-fungible, which means they are designed to be unique and not replaced with something else. While NFTs are popularly used in art and digital content, they have the potential be used to represent real-world, physical assets, such as real estate.

Hedge Funds

Hedge funds are investment pools that utilize various strategies in order to maximize and beat average investment returns for their clients. High investment minimums and net worth requirements typically limit these investments to wealthier investors. The non-traditional investment strategies utilized by hedge funds can provide higher than average returns, but not without equal, or even higher risk.

Commodities

Commodity investing is when investors purchase raw materials used in the production of other products, such as precious metals, energy resources, like oil or natural gas, or agricultural products, like wheat. Commodities are considered inelastic, meaning that a customer’s demand for the product remains unchanged despite price fluctuations. Commodities are essential for human existence, and therefore can provide portfolio diversification not seen in other investment types.

Collectibles

Collectibles are items purchased with the goal of long-term appreciation, namely the ability to sell at a price higher than the original purchase price. Typically, either out of production, or only a limited quantity were manufactured, certain collectibles are highly sought after by collectors. Examples of collectibles include comic books, video games, or trading cards.

Characteristics of Alternative Investing, Particularly Startups

As with any investment strategy, alternative investing carries both risk and potential for great reward, albeit at the more extreme sides of the spectrum. Let’s take a look at some of the differences and potential pros and cons of alternative asset investments.

Market Volatility

Alternative assets aren’t on the stock exchange. This can make these investments a good choice for portfolio diversification since they generally aren’t affected by market fluctuations in the same ways your traditional assets are, helping provide some balance in your portfolio.

Access

Venture capital and private equity are available to anyone who is an accredited investor, as defined by the SEC. If you don’t meet the accredited investor qualifications, you can still invest in crowdfunding offerings, which are open to the general public. Likewise, investment opportunities in most types of alternative assets, such as real estate and collectibles, are also open to the general public—unless they are bundled within, and investment is offered as units of, a special purpose vehicle.

Investment Updates

Because startups are not publicly traded, you will not receive the same type of updates you would for public stock investments. According to the SEC, companies and private funds with exempt offerings don’t have to provide prescribed disclosures to accredited investors. However, some startups will provide updates even though they’re not required, and there are no rules against requesting information. You also have the opportunity to (and should) perform due diligence before making an investment.

Liquidity

Investments in startups, especially early stage startups, will typically be held for a lengthy period of time. For example, during 2001 through 2019, the median age of a startup at its initial public offering (IPO) was 10 years old, according to the Initial Public Offerings: Updated Statistics report.

There may be some exceptions that allow you to liquidate before the startup you’ve invested in reaches an exit. This SEC guidance describes allowable conditions of resale, but keep in mind that liquidation is also subject to the discretion of the issuer.

Risk

Investing in startups requires a high risk tolerance. There are not only no guarantees that you will receive a good return on investment, but the startup could fail and you may lose your original investment.

Potential Return on Investment

Many startup investors hope to invest early in the next big companies. For the investors who pick the right startups at the right time, the return on investment can be well worth the wait, and a startup doesn’t need to be a splashy name in order to yield a decent return on investment when it reaches an exit.

Targeted Interests and Values

One of the intangible rewards of investing in alternative assets such as startups is that you can support young companies that pursue interests or values you share, and you can jump in on product or value trends, such as sustainable fashion or CBD-based products coming to market. Investing in startups can also allow you explore investments in niche and emerging markets.

Consider Whether Alternative Investing Is Right for You

Alternative investing can offer portfolio diversification and possible market-correlated risk mitigation with the potential for higher returns, but they are not without risk. As alternative investments become more popular and more available to different types of investors, they’re becoming more important to understand.

If you believe that the balance of higher risk and potential reward makes sense for your investment portfolio and financial goals, check out our current investment opportunities.

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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.