Alternative investments are financial assets that fall outside the bounds of traditional investment categories. Standard investment assets include stocks and bonds, while alternative investments range from venture capital to art and antiques. Institutional investors typically manage alternative assets and can present a significant risk in the complex, unregulated nature of alternative asset investing. High minimum investments also make alternative asset investing prohibitive for many individual investors.
However, alternative investments present many advantages, including fewer transactional fees. Individuals interested in expanding into the alternative investments market should familiarize themselves with the most popular categories.
Real estate investments represent one of the most well-known categories of alternative investments. Real estate is the world's most common and largest asset class. Real estate is comparable to bonds as an investment category in that a property can produce liquid cash from tenants. Still, it can also function as equity with long-term value that can increase through capital appreciation. Like other real asset categories, real estate investments can be difficult to evaluate effectively. Valuation skills and flexibility are important traits for an alternative asset investor specializing in real estate.
When considering alternative investment categories, they may consider rare, vintage items and collectibles. Specific examples include expensive wines, exotic cars, and fine art. Collectibles differ from other alternative asset classes in many ways, perhaps most notably in that owners must physically maintain and protect items with the hope that they accrue value over time. Investors risk a lack of appreciation after a high upfront acquisition on top of the risk of damage and theft.
Private equity and private debt are further examples of alternative investment categories. Private equity serves as a broad asset category encompassing all capital investments not listed on the New York Stock Exchange or another public exchange. Subsets range from growth capital to buyouts. Meanwhile, private debt serves as an investment not traded on an open market or backed by a financial institution, such as a bank loan. Corporations often use private debt to raise capital for expansion.
Hedge funds, including pension and mutual funds, are alternative investment tools that trade liquid assets. Investors must learn many strategies to optimize their returns, with common tactics including quantitative analysis and long-short equity. Investors must also learn about volatility arbitrage and market neutrality. It should be noted that hedge funds are only open to institutional investors.
Professionals categorize commodities like agricultural products and natural gas as real assets. Investors value them to hedge their portfolios against inflation. When demand is up, commodities yield additional investor profit, though investments can decrease in value if demand wanes.
Finally, structured products include collateralized debt obligations and credit default swaps. Perhaps more than any other alternative asset class, structured products have high complexity and remain susceptible to risk. Investment banks develop them and provide them to hedge funds and retail investors. Mortgage-backed securities and other structured products incurred significant losses during the 2007-2008 housing market financial crisis.
These are only a few examples of alternative investment categories. Alternative investment classes for 2025 and beyond include private credit and evergreen fund structures, also known as hybrid fund structures.
