Alternative Investing Isn’t Just for the Wealthy

October 12, 2021

Alternative investing isn’t just a playground for the ultra-rich. Here’s why alternative investing isn’t just for the wealthy anymore.

Did you know that 81% of ultra-high-net-worth investors (investors with a net worth of $30 million or more) rely on alternative investments? Or that on average, ultra-high-net-worth individuals have 50% of their assets in alternative investments?

What if we told you that you don’t need to be Jeff Bezos or Bill Gates to take advantage of alternative investments?

These days, alternative investments are a valuable tool for ordinary investors, and they’re more accessible than ever before. Here’s why alternative investing isn’t just for the wealthy.

What are Alternative Investments?

Alternative investments are any type of investment that doesn’t fall into one of the three conventional investment categories:

  1. Stocks
  2. Bonds
  3. Cash

This makes alternative investments a pretty broad category covering a wide range of investments, including:

  • Art
  • Antiquities
  • Real estate
  • Hedge funds
  • Private equity
  • Venture capital
  • Managed futures
  • Derivatives contracts
  • High-end wine
  • Racehorses
  • Tax lien certificates
  • Structured settlements
  • Structured products

As you can see, alternative investments can have pretty diverse characteristics. In general, though, alternative investments tend to be less liquid, less regulated, and way more complex than conventional investments.

Why Alternative Investments Were the Playground of the Wealthy

Traditionally, alternative investments were held by two groups of people:

  1. Accredited investors who qualify for the phrase “high-net-worth”
  2. Institutional investors, like banks or hedge funds

That’s because many alternative investments have high up-front investment fees and high initial minimums that priced most average investors out of the market. Plus, alternative investments have fewer opportunities to publish verifiable performance data for investors. Some alternative investments are so rarefied that it’s difficult to even value them, since there’s nothing to compare them against. In addition, many alternative investment industries move on knowledge passed among in-the-know insiders.

Take art, for example.

Blue-chip art is easy to buy but difficult to sell. Galleries trafficking in new artists are reluctant to sell a work they’ve already sold once since they can usually get more money for new works by the same artists. You can turn to auction houses, but they’re only interested in proven names, so as-yet-unknown and out-of-favor artists won’t get a second glance.

Plus, like stocks and bonds, insider information drives value, but unlike stocks and bonds, art world insiders are under no legal obligation to share what they know. In fact, knowledgeable insiders regularly (and legally) trade on their information to make a profit.

Then there’s the initial cost. For art to be worthwhile as an investment asset, it has to be blue-chip art, which is art of great value that is expected to hold steady or increase in value over time regardless of the economy, almost always created by heavyweight names on the scale of Dali or Warhol who have stellar records on the auction market. The reason why blue-chip art is the only worthwhile investment asset in the art world is because the art market is largely illiquid save for top names in the auction circuit.

In other words, you have to be able to drop millions on a painting for it to be worth it.

Why Alternative Investments are Opening to Average Investors

So why is it that the art world is seeing a surge of young collectors, especially Millennial collectors who view art as a worthwhile investment asset in a larger wealth-building strategy?

To put it simply, the alternative investment game changed.

For the average investor, the rise of crowdfunding is a game-changer. Now investors don’t need to have millions in liquid assets—they can instead buy a share of an asset and earn a profit based on their shares, which brings previously inaccessible asset classes in reach.

Investors also increasingly understand something the ultra-wealthy have understood for a long time: that diversification is critical to a healthy portfolio and successful long-term wealth building. Investors are now increasingly diversifying with alternative investments rather than their usual run of stocks and bonds.

Why? It’s simple: alternative investments have long been used by the ultra-wealthy as a hedge against market volatility and inflation because they have a low correlation to the stock market. A painting has intrinsic value in its own right, regardless of what the stock market does. In fact, many alternative investments can move in opposite directions from the stock market.

Plus, because alternative investments like art have value in their own right, they’re a good hedge against inflation in the long run.

Should You Try Your Hand in Alternative Investments?

Are alternative investments the right choice for you? Start by asking yourself one question: do you need a portfolio that can withstand stock market volatility? If so, you need diversification, and alternative investments are a great way to do that.

With any form of alternative investment, it pays to do your homework. Figure out your budget and risk tolerance, then start reading up on alternative investments that interest you. These assets are much more complex than your average Apple stock, so knowledge is power.

Alternative Investing Isn’t Limited to the Wealthy—Let’s Make Your Money Go Farther

Why should you settle for an at-risk portfolio when you could make your money work harder?

Here at Masterworks, we’re on a mission to make blue-chip art accessible to ordinary investors. Our expert research team collaborates with Citi Bank and Bank of America to identify artist markets with the best potential risk-adjusted returns, then works with art professionals to handle the purchasing process. Then, we make shares of multi-million-dollar art available to investors. Ready to get started with alternative investments? Fill out your membership application today.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.