3 Alternative Investment Strategies You Need to Try
Once the exclusive playground of the ultra-wealthy, alternative investments are becoming increasingly mainstream, with surging demand for alternatives among institutional investors and ordinary investors alike. As investment firms increasingly turn to personalized services and investment outcomes over products, alternative investments are an increasingly important part of the equation.
Even better? Thanks to innovations in the market, alternative investments are now more accessible to ordinary investors than ever before.
What are alternative investment strategies? And what are your best options to bolster your portfolio? Here’s a primer for new investors.
What are Alternative Investment Strategies?
Don’t let the name scare you—alternative investments are basically anything that isn’t a stock, bond, or cash, and as a consequence isn’t traded on conventional investment markets.
As you can probably guess, this covers a massive range of potential investments, including:
- Fine art
- Real estate
- Hedge funds
- Precious metals
- Private equity
- Private debt
- Venture capital
- Peer-to-peer lending
- Distressed securities
However, alternative investments generally have a few features in common.
First, their markets are much more niche than conventional assets, between a smaller buyer pool and higher initial investment costs. Second, alternative investments are often harder to value than conventional assets, since they don’t publish verifiable performance information anywhere near as often. Third, because of the aforementioned qualities, they tend to be illiquid, especially compared to conventional assets.
However, alternative investments also have low correlation to the stock market. A Matisse, for example, has inherent value because it’s a Matisse. A hedge fund is only limited by its mandate and aims to profit irrespective of how the market performs. This means they often retain value regardless of stock market performance and may even perform opposite the stock market.
For this reason, investors often turn to alternatives to diversify their portfolios, as well as inflation hedging (protecting your portfolio against decreased currency buying power through assets that outpace inflationary markets).
Alternative Investment Strategies to Try
Ready to get started in alternative investments? Here are some of the best alternative investment strategies to try in your portfolio.
When you picture an art investor, you probably picture someone in a Wall Street suit and a self-important stroll, perusing an art gallery and recognizing artists and gallerists by name before gifting their multi-million-dollar beneficence on an artist (and doing so for the status of being able to do it). In reality, art is an exciting asset class with the potential to generate real returns. After all, blue-chip art has outperformed the S&P 500 by 180% from 2000 to 2018.
Think about that for a minute: from 2000 to 2018, fine art outperformed the 500 largest publicly traded companies in the U.S. by 180%.
Art investing is a buy-and-hold strategy—you purchase art, hold onto it for several years (anywhere from three to ten or even longer) and sell it once it’s appreciated. Keep in mind that art is largely illiquid except at the highest level (blue-chip art, which is multi-million-dollar art by auction circuit heavyweights a la Picasso and Koons). Here at Masterworks, we use a crowdfunding model to allow regular investors to buy shares in blue-chip art.
You also need to have insider access, since art world insiders regularly (and perfectly legally) trade on market-moving information for profits (like a gallerist letting a client know that an artist will have a major museum show in a few years, likely raising the value of their current art). In stocks, that’s called insider trading, and it’s illegal. Don’t worry—our team at Masterworks has decades of art world experience and connections to trade on.
Real estate is perhaps the most familiar alternative investment strategy out there.
In real estate investing, you make money in two ways: buying and flipping a property for profit or buying and holding a property to make money on rental income. Most people opt for rental income, since buying and flipping fixer uppers is an art and a science (and a lot harder than it looks).
The good news is that thanks to the advent of crowdfunding, it’s now possible for ordinary investors to 1) afford to invest in real estate, and 2) invest in real estate without the headache of becoming a landlord. Take a look at some of the best crowdfunded real estate apps like Fundrise, Yieldstreet, and Crowdstreet.
Humans have counted on gold as a store of value for centuries. We’re no longer on the gold standard, but gold itself remains a well-recognized inflation hedge, long-term value store, and liquid asset that competes nicely with stocks. Plus, it has low correlation with most other asset classes—gold is gold, and in tough times, gold is a useful rescue asset.
For ordinary investors, the best way to invest in gold is through direct ownership. This usually means purchasing gold bullion (physical forms of gold, like coins or bars).
Let’s get this perfectly clear: gold is an investment. Gold jewelry is a luxury item. If a jeweler says an item is an investment piece, they’re pitching you like a used car salesman. Stick to gold bullion and spend some time getting familiar with factors that drive gold prices.