The Definitive List of Alternative Investments
Looking to try your hand at alternative investments? Here’s a list of alternative investments that every investor should know.
Did you know there’s a whole world of investing out there beyond Wall Street stocks and bonds? In fact, stocks are only part of the picture—and some of the most dynamic asset classes fall under the umbrella of alternative investments.
Better still, alternative investments are becoming increasingly accessible to everyday investors.
Not sure where to begin with alternative investments? We’ve got you covered. Keep reading for your go-to list of alternative investments that all new investors should know.
What are Alternative Investments?
Alternative investment is a broad umbrella term referring to any investment asset that does not fall into one of the conventional investment categories.
There are three conventional categories, and chances are, you’ve heard of them before:
You’ve likely heard of these categories before because they’re the investments that most investors rely on. Historically, alternative investments were the purview of high-net-worth individuals and institutional investors. These days, though, alternative investments are seeing a surge in popularity—at BlackRock, a major international asset management firm, ordinary investors are expected to increase their alternative investments between 3 to 25%.
That’s because ordinary investors are starting to recognize that while alternative investments are complex and higher risk, they also carry significant payoffs, and because they’re not subject to the whims of the market, they’re an excellent choice for diversification.
Alternative Investments Every Investor Should Know
The trick is knowing where to begin with alternative investments. Keep in mind that this is a broad category—art, for example, is a real asset and qualifies as an alternative investment.
Here are some of the most common alternative investments that ordinary investors should know.
Private equity refers to capital investment in a company that is not publicly traded or listed. That’s a big deal, considering that most companies aren’t actually publicly traded.
Keep in mind that this isn’t just stocks. Private equity is a broad category with several subsets, including:
- Venture capital
- Growth capital
This particular category of alternative investment has long been the purview of high-net-worth individuals and institutional investors because it requires a significant capital outlay, usually performed through a private equity firm. One estimate placed the number between $200,000 and $1 million to invest in a company through a private equity firm.
Hedge funds are a lot like mutual funds. In fact, they rely on the same basic strategy: pooling investor funds and investing the money for a positive return. The difference is that hedge funds have much freer rein to invest aggressively, and they have far more flexibility in their chosen financial products than your average mutual fund.
Mutual funds have to stick to stocks and bonds. Hedge funds, on the other hand, have an investment universe that is only limited by their mandate. In other words, they can invest in anything (stocks, land, real estate, currencies, anything) and they can use different techniques to earn money. Many hedge funds rely on leverage (in other words, borrowing to increase their investment exposure), short-selling, and other speculative investment practices that mutual funds are not allowed to use.
For this reason, hedge funds are not as highly regulated as mutual funds, but conversely, they don’t have many of the federal and state protections required of a mutual fund, such as investor disclosure requirements.
Wait, debt is an investment? Yes—if it’s private debt, that is.
Private debt has only recently been considered as an asset class, and it broadly refers to investments that are not financed by banks or traded on an open market. The “private” part refers to the investment, not the investor. Within the private debt market, investors lend to investee entities (corporations, for instance) in much the same way a bank would.
For those who issue private debt, you earn money in two ways: repayment of the initial loan and interest on the original balance.
The most common alternative investment is investing in real estate—literally physical pieces of land. In fact, real estate is the world’s biggest asset class.
Here’s the catch: you don’t buy investment properties the same way you buy a house. With investment properties, you do not reside in the property. Instead, you earn money by flipping the property to sell or by renting it to generate income over time.
To become a successful real estate investor, you need excellent valuation skills, as well as the know-how to figure out when and how to apply various methods.
Here at Masterworks, our specialty is blue-chip art, which is a type of commodity investment.
The term “blue-chip” was coined in 1923 by a Dow Jones employee called Oliver Gingold, who used the term blue-chip stocks to refer to stocks selling at $200 or more per share (referencing the blue chip in poker, which is the most valuable). Blue-chip art refers to iconic art that is reliably profitable and expected to hold steady or increase in economic value over time.
We’re not talking about your grandma’s flower painting. We’re talking about the art that people pay money to ogle at in museums, art by masters known outside the art world—Picasso, Van Gogh, Frida Kahlo, Andy Warhol, and Damien Hirst, to name a few.
This is the area code where art collectors become investors, finding the meeting point between personal favorites and status symbols. Because art is an illiquid asset, its value holds steady against inflation over time.
Let’s Make Your Money Go the Extra Mile
Ready to try your hand at investing—and go beyond simple stocks? We can’t blame you. After all, blue-chip art outperformed the S&P 500 by 180% from 2000 to 2018.
Here at Masterworks, we make it possible for regular investors to invest in the exciting blue-chip art asset class, and we do it by applying expert investing knowledge. Using proprietary data, we assess what artist markets have the most momentum and the best risk-adjusted returns. Then, we simplify the process of acquiring art so that you can diversify your portfolio and make the most of each investment. Ready to get started? Then click here to request an invitation.