Investment opportunities for investors are becoming harder to score better returns. There is good news, however. Investors should consider alternative investment vehicles outside the world of stocks, bonds, funds, and other pre-packaged products.
Alternative investments include venture capital, private equity, p2p investing, hedge funds, real estate investment trusts, commodities plus tangible assets like precious metals, rare coins, wine and art.
And how big is the alternative investment market?
According to research, the alternative investment industry is expected to grow by 59% by 2023, reaching $14 trillion.
What is an alternative investment?
An alternative investment is any investment that lies outside the traditional areas of cash, stocks and bonds.
Alternative investments include investments in tangible assets, like antiques, art and wine, plus financial assets, like private equity and cryptocurrencies.
Alternative investments have a low level of correlation with traditional assets. Therefore, these types of investments are less exposed to market conditions and can be used to reduce your investment portfolio’s overall risk through diversification.
Investing in assets often necessitate an exceptionally high level of analysis as it can be challenging to determine their current market value.
It’s up to individual investors to determine any alternatives they decide to include in their investment portfolios.
The great news is that the amount of alternative investment options available to investors has risen over the past few years.
What are the potential benefits of alternative investments?
Alternative investments can be an excellent way to diversify an investor’s portfolio and reduce their exposure to stock market shocks, as with traditional investments.
However, low-risk alternative investment options like antiques, art, coins and wine are unlikely to make or lose much money. They are thus creating possibilities to generate some additional income.
Although some investments are off-limits for retirement accounts, the list of alternative investments is still reasonably diverse whether to grow an investor’s capital or provide an income.
However, the benefits of alternative investments can go even further than only building wealth.
By allocating investor money to more niche projects like startups or documentaries, some investors can feel good knowing they contribute to a cause they care about.
What to know before considering alternative investing
Generating higher returns typically comes with higher risks —as is the case with alternative investment options.
Suppose individual investors are considering multiple options from a list of alternative investments. In that case, they and their investment advisor must perform due diligence to determine which options are suitable for each investor.
Remarkably accurate given that the performance of some alternative investment ideas are non-public, that can sometimes make an adequate risk assessment and investment performance challenging to analyse.
There will always be some element of risk involved, so it is crucial to consider all aspects before investing, and investors should be realistic about how much risk they are willing to accept.
Investors should consider asking themselves the following:
- Are they able to afford these recurring fees?
- How easily can they withdraw their capital when they need it?
- How would they feel if they lost some of their wealth?
Once they feel confident in their answers, they should consider adding additional alternative investment ideas to their traditional investment portfolio.
18 types of alternative investments for investors
1# Antiques, art, coins & wine
Whilst Antiques, art, coins and wine may be considered hobbies rather than a form of investment; there are returns to be gained for those able to recognise a good bargain when they see one.
Fine wine has long been a source of not only enjoyment but a reliable investment option. According to the Telegraph, several investors have seen returns of over 150% over five years.
Antiques, classic cars, art and collectables have also seen prices increase. However, these assets are often cyclable, so it’s critical to understand trends and when the next downturn may occur. Similar to a property, many antiques (but not all) appreciate as they become older and harder to find.
However, whilst the stock and art markets do not usually rise and fall simultaneously, art still endures its shifts that can make investing risky.
There are two types of coins to note when buying them to invest in, bullion coins and collectable coins. Bullion coins are produced by national governments, usually in highly-desired metals like gold.
Bullion coins are not collectable because they don’t derive their value from their scarcity, but because of the metal the coins are minted in.
Collectable coins are valued not for their weight in precious metals but because there are few of them made. As they are not in general circulation, they are scarce and, thus, highly collectable.
2# Hedge funds
Hedge funds are handled by an investment manager who picks which funds to invest in. Hedge funds enable individual and group investors to diversify their portfolios in multiple asset (and complicated) structures, thus spreading a portfolio’s risk.
Hedge funds have proved to be reasonably reliable at gaining returns for investors. However, investors should note that hedge funds are commonly considered more risky, aggressive, and exclusive than mutual funds.
Investors should also note that the fees charged for participating in these funds are higher than other investment vehicles, with the fund manager taking a cut of the profits earned.
3# Peer-to-peer loans
Peer-to-peer lending has been rising rapidly during the past few years. Peer-to-peer platforms cut out the ‘middlemen’ in the crowdfunding lending process, reducing the fees involved in lending and obtaining profits.
Because of this, both lenders and borrowers obtain better rates than if they went to their bank.
P2P lending offers investors a more comprehensive range of investment options to choose from, thus diversifying their portfolios and minimising risk to their capital. Plus, P2P lending can begin with only a few euros/pounds/dollars, so it is an excellent option for new investors.
Howard Marks of Oaktree Capital Management cites P2P as one unique niche where he feels there is more potential for bargains.
4# Property & real estate
Commercial or residential property is a profitable asset to hold in any portfolio seeking short and long-term returns.
Property and real estate investments can range far and wide. They could include buying undervalued properties, renovating them and selling for a profit.
Other property and real estate investments include purchasing a share of commercial property through a peer-to-peer property-focused website where the property is managed and rented out by the platform.
Property does have its risks: the market is generally cyclical and will experience periods of decreasing value. Whilst this may impact shorter-term investors, property has commonly been seen to increase in value and thus returns in the long-term.
Another unique alternative investment idea is to invest in farmland. Similar to investing in property, the potential upside to purchasing farmland is appreciation.
Furthermore, investors can lease or sharecrop the farmland to make additional profits.
Since this is a niche investment, investors will want to collaborate with a property professional who specialises in farm real estate.
Also, investors will need to consider how long they are willing to wait to see any returns. Most farmland investors will only see returns after around five years plus.
Cryptocurrency continues to attract much hype surrounding its technological potential, the blockchain.
Cryptocurrencies are virtual currencies that aim to operate independently of a centralised regulating body. Crypto refers to the encryption utilised to ensure that transactions are encrypted and safe.
The amount of virtual and digital currencies continues to grow, with each claiming some form of uniqueness. Although, most will trace their lineage to the original cryptocurrency: Bitcoin.
Early-adopter investors who foresee its value before the craze hit a few years ago made a small fortune.
However, those who joined too late probably made some losses as Bitcoin’s volatility caused its value to be wiped overnight. Even today, the original cryptocurrency remains volatile in the current COVID-19 world.
Furthermore, governments are still concerned surrounding how cryptocurrencies and exchanges will be regulated. Investors should watch out that some currencies are likely to be abandoned entirely should they be viewed as ‘unregulated’ by governments.
7# Private equity funds
Investing into private equity funds is where investors invest in a fund that invests its capital into other private companies.
Investors contribute capital to the fund and then receive returns on their initial capital investment once the companies that the fund invest in reach particular life-cycle stages. For instance, during an initial public offering (IPO) of stock or a merger.
Private equity investment has often provided much-needed capital for startup companies in fields like:
- alternative energy
Private equity investing’s success depends on how well the company performs, which is a risky proposition, even in the right economic environment.
8# Venture capital funds
Similar to investing in private equity funds, venture capital (VC) funds are an option to invest in private ventures through a fund. The difference is that venture capital funds diversify investor risk by investing in early-stage companies.
However, early-stage investments are very high risk and far more likely to fail than they are to succeed. Although, those that do well can make investors significant returns.
In a typical VC fund, the goal is that at least one company will exceptionally perform. Thus, covering the investment costs of all the losses contained in the other early-stage investments.
It should be noted, though, that venture capital investing is one of the riskiest asset classes to invest in. Investor returns can take several years to materialise, and only some will see a return on their initial investment.
Be aware that most early-stage companies have a high probability of failure.
9# Managed futures & options
Like hedge funds, managed futures funds are managed by fund managers. Future fund managers invest investors’ money in futures or options in the commodities, currency and interest rate markets.
Futures and options are primarily bets on how a specific equity or investment will perform in the future. A future then is a contract to buy a particular amount of a commodity, stock or even currency at a set price in the future on a set date.
The buyer or the seller of the bet can then make a profit dependent on if the actual price rises or falls as per the agreed-upon price.
Options work similarly, with the difference being that the buyer is provided with an option to buy the investment and not an obligation.
Managed futures keep investor portfolios diverse since they typically do not follow market trends. Still, the nature of predicting the performance of various commodity markets makes futures and options more high risk.
10# Forex (foreign exchange)
Foreign exchange, or forex, is the selling and buying of various currencies to exploit their value fluctuations. Known as arbitrage, it is counting on adjustments in currency market prices over time.
Currency prices are continually fluctuating as world events unfold. Investors may wake up one morning to discover a national coup or natural disaster or another circumstance that has caused their holdings in a specific currency to rocket up or plunge.
11# Financial derivatives
Financial derivatives are securities that include options, futures, forwards and swaps. Derivatives are an agreement where once an individual asset reaches a specific level, it pays out to an investor.
Futures and options (see alternative investment ideas 8#) are explained above. A swap is an asset exchanged between two parties, obtaining a preferential interest rate for both.
Derivatives have a lousy reputation because economists have linked the 2008 credit crisis to the unregulated derivatives market and the subsequent mortgage crisis.
However, if used ‘wisely’, derivatives can be used to minimise investment risk within a portfolio.
For instance, a fund manager might use commodity futures to offset potential losses in currency investments.
There are some derivatives like futures and options that are relatively manageable for individual investors. Large institutional investors and managed funds usually manage swaps.
12# Trade Finance
Trade finance facilitates trade between buyers (importers) and sellers (exporters) by providing the necessary financing for and reducing the risks associated with commercial transactions.
Given that some 80 to 90% of world trade relies on trade finance, it holds immense influence on economic growth at both the local and international levels.
A typical trade finance loan provides funding to the exporting company. It is secured by the collateral being exported, usually some form of commodity or goods.
Sales are generated when importers pay the exporter for delivering the materials. Once received, the exporter then can repay their trade finance loan(s).
Trade financing offers a variety of financing options designed to expedite commercial trade whilst mitigating risks to investor capital.
Commodities include assets and resources like gold, oil, other precious metals like copper, fossil fuels, crops, and livestock.
Like the futures market, commodities are highly volatile because natural disasters and world events can directly impact prices. You only have to look this year to notice how the value of crude oil plummeted.
Agriculture is another volatile example. A considerable surplus of crop foodstuffs could make the price of that commodity fall dramatically. The following year, the country could experience drought, and the said crop value will rise as its scarcity triggers an increase in demand.
The safest way for individual investors to reap the benefits of rising commodity prices is to purchase many different commodities rather than focusing on one.
Investors can eliminate some of the uncertainty from choosing which commodities might rise and fall at a given moment doing it his way.
14# Gas & oil production
Gas and oil producers are faced with relentless pressure to grow production, and how they grow production is mainly through capital investments.
This alternative investment can be appealing for diversifying an investors’ portfolio diversification.
However, Gas and oil production is a volatile alternative, so investors should embrace themselves for both gains and losses and have a high-risk tolerance.
15# Marine finance
Marine finance is financing the construction, scrapping, or acquisition of vessels like boats and ships. According to the International Marine Organization, over 90% of everything we consume travels by boat, by sea, amounting to 12 trillion USD in 2017.
However, investors must do their research as marine finance is highly influenced by market trends, including any downturns in the global markets or tariff hikes.
Although it takes on some risk, marine finance could be a potentially exciting investment opportunity.
16# Aviation finance
Aviation finance used to be a sound investment. However, with the coronavirus pandemic, the airline industry has taken a severe downturn.
Before considering investing in aviation finance, investors should determine whether they believe air travel will return to pre-COVID levels.
If investors wish to invest in aviation, it is probably best to work with a professional from a fund rather than directly financing. A professional will understand air travel market trends and industry regulations.
Aircraft typically have a long life-span of 20-25 years, meaning investors have a tangible asset in their corner. However, like most other tangible assets, aircraft do depreciate over time.
An annuity is actually an insurance product rather than an investment. Annuities pay a fixed sum per year for life (or a set period) and can be inherited by an heir.
Annuities provide a stable, long-term growth income for those who purchase one. Investors can manage how much income and risk they are comfortable with.
The payout is usually when an individual retires and wishes to supplement their pension, retirement savings and other investments.
When considering investing in annuities, be mindful of the fees involved as they can add up, and withdrawal fees are costly.
A seriously alternative investment option is to invest in producing films or movies.
Although this is undoubtedly alluring before investors think about a Hollywood spectacle’s glamour, most film investment is surrounding documentary and art-house films. Thus it can be risky as the film may not be even successful.
Kickstarter has a list of films that investors can consider investing in, but once again determine whether the audience is for the masses or a niche one, as this will limit its viewers.
Investing in films does have the added benefit of supporting causes an investor cares passionately about and thus promoting it worldwide.
Are alternative investments riskier?
There are, of course, several individuals who don’t believe alternatives belong in a portfolio. Some cite a lack of liquidity and transparency in his reasoning. This point does hold for specific alternative investments (although traditional assets, as per derivatives trading in 2008, are hardly open for scrutiny).
Other sources state that including alternatives and diversifying a portfolio increases the likelihood of generating returns with lower risk.
As with any investment, investors need to be meticulous in due diligence before committing their cash to an alternative. Taking an in-depth look at investment requirements ensures the portfolio can accommodate the potential risk and long-term positions that are needed.
Also, note that historical performance is not an indication of future returns; if in doubt, always seek a financial adviser’s guidance.
Alternative investments are not only for deep-pocketed institutions and the very wealthy.
Individual investors seeking to beef-up their portfolios can now diversify and seek better returns by considering the plethora of alternative investments available.
*The information contained in this article is provided for general informational purposes only. It should neither be construed nor intended to recommend purchasing, selling, or holding any security or otherwise be considered as investment, tax, financial, accounting, legal, regulatory or compliance advice.*