Alternative Investments: What Investors Need to Know
Nontraditional markets continue to hold great interest, especially after the rough couple of years we’ve had. Each day, more and more investors look to generate income and improve their returns by shifting to alternative investment markets.
However, not everyone can tap into alternative investments. Only high-net-worth investors have access to them as they aren’t always included in official financial regulators. Those allowed to invest in alternative markets are usually two entities: accredited investors and qualified purchasers.
Accredited investors’ income must exceed $200,000, whereas qualified purchasers must have a comprehensive investment portfolio with over $5 million in investments.
What are Alternative Investments?
Alternative investments have had a higher investment return than public equity markets throughout history. Investors look for alternative assets beyond the traditional markets of stocks, cash, or income.
The buyers are ready to lock up their money for five years or maybe a decade in specific markets with alternative investments. Having enough resources to invest and wait for a decade on your return may seem risky, but it’s usually worth the wait for the big players.
List of Alternative Investments
Many alternative assets surpass the traditional market. They don’t correlate with stocks, and most are dependent on equity returns.
Some of the most common and best alternative investments to consider include:
– Private equity
– Venture Capital
– Hedge funds
– Real estate
– Private debt
What is Private Equity
Private equity represents investing in companies that aren’t in the public trading market. The investors put money in a company and wait for as long as an entire decade to get their investment back and earn profit. They need to wait for an initial public offering where the private equity will sell the holdings. Alternatively, they can sell in a merger or directly to a strategic buyer.
What is Venture Capital
As a subcategory of private equity, venture capital is one of the most used alternative investment services. It includes investing in start-up companies at their earliest stages. However, it always refers to companies with a significant potential for growth or those looking to expand their product line soon broadly.
While there is usually a high reward for the investor if the company succeeds, there is also high-risk potential. Early-stage companies aren’t making a profit yet, and many of them may potentially fail to reach significant revenue or growth.
What are Hedge Funds
Hedge funds fall in the less money-captivating and more versatile investment markets. There are many hedge-fund strategies investors use to boost their profit.
For example, when investors put money in a company with a significant potential for growth, they needn’t wait a decade to see their investment return. Instead, they are allowed to sell short or even bet against the company they invested in and still profit if its value goes downhill.
When traditional assets fall, hedge fund strategies allow the investors to place money on various asset classes and use different methods to see the investment return.
What are Private Real Estate Investments
When you buy an investment property like residential real estate or office buildings you plan on renting, it falls into alternative investing. As an investor, you may not want to become a landlord, which is why most investors use brokers to invest in real estate investment trusts (REITs.) You may find the publicly traded ones fully displayed on stock exchanges.
Although public real estate investment funds function similarly to real estate, the trade-in exchanges make them equity-oriented.
Also, farmland and timberland fall into the private real estate investments category.
What is Private Debt
Private debt is also known as personal credit. It represents a profitable opportunity for investors to generate higher profits than anything currently available in the public markets. Some companies turn to private equity when they need funding, while others turn to private lenders.
There are several types of private debt, some of which are on a high payout structure, especially if they aren’t risky. For example, investing in the debt of a company under stress is considered riskier than investing in one that’s doing relatively well.
What are Commodities
In the alternative investment industry, commodities fall under the best alternative investments. When talking about commodities, we usually refer to natural resource investments. For example, investing in corn, crude oil, coffee, or similar assets means investing in commodities.
Commodities available for investing are in the futures market, and there are specific times during the year when the contract reaches maturity.
An investor must sell before the deal matures and buy a new one to hold the desired position. Often, it means the new contact requires more money than the old one, which can sometimes affect general performance.
Some popular commodity markets, such as oil and gold, are available via ETFs.