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.
What is alternative investing?
To understand what alternative investing is, let’s first define traditional asset classes. Traditional asset classes include stocks, bonds, ETFs, and mutual funds. Each 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.
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, intellectual property, commodities, film, and more. Essentially, alternative assets are any type of investment that falls outside of the traditional asset types we mentioned above.
Types of alternative investing
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.
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.
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 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.
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 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.
Potential benefits of alternative investing
Alternative investments can offer portfolio diversification and possible market-correlated risk mitigation with the potential for higher returns. 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.
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.