5 Key Benefits of Alternative Investments
Looking for a trusted network of high-net-worth peers? Apply now to join Long Angle, a vetted community of high-net-worth investors, entrepreneurs, and professionals. Access confidential discussions, live events, peer groups, and private market deals.
Table of Contents
What Are Alternative Investments?
Alternative Investments versus Traditional Investments
Types of Alternative Investments
5 Benefits of Alternative Investments
How to Invest in Alternative Assets
Frequently Asked Questions
Conclusion
High-net-worth individuals have more choices than ever when choosing where to invest. Which options complement their current portfolio? Which are likely to offer the best returns with the least risk?
HNW investors are increasingly opting for alternatives to traditional investment vehicles, like stocks and bonds, to improve their overall wealth management strategies.
This guide will cover the benefits of alternative investments and how they can fit into a well-rounded portfolio.
What Are Alternative Investments?
Alternative investments are financial assets that do not fall into conventional categories, such as stocks, bonds, or cash. These investments typically include private equity, hedge funds, real estate, commodities, and tangible assets like art and collectibles. Alternative investments offer portfolio diversification and reduce volatility.
Unlike traditional investments, which are often publicly traded and liquid, alternative investments are typically less liquid and have a longer investment horizon. This illiquidity, however, may be compensated by potentially higher returns and other distinctive advantages.
For high-net-worth individuals, alternative investments present an opportunity to diversify holdings and reduce dependence on traditional markets.
High-Net-Worth Asset Allocation Report
Long Angle's annual high-net-worth asset allocation report presents the latest investment trends and strategies for portfolios ranging from high-net-worth to ultra-high-net-worth investors.
Alternative Investments vs. Traditional Investments
Alternative investments differ from traditional ones in two main ways:
Liquidity
Traditional investments—such as stocks, bonds, and mutual funds—are typically characterized by their high liquidity, ease of access, and regulation by government bodies like the SEC. These publicly traded assets allow investors to buy and sell them relatively easily. They also tend to be more transparent, with readily available information regarding performance, risks, and fees.
In contrast, alternative investments often involve assets that are not publicly traded and can be significantly less liquid. This means investors may need to commit their capital for a longer period. However, alternative investments can provide access to markets and opportunities not available through traditional means.
For example, private equity and hedge funds offer the potential for higher returns by investing in private companies or employing sophisticated strategies not typically available to the average investor.
Hedging
Traditional investments are highly susceptible to the ups and downs of the stock market, while alternative investments are less tied to stock market performance. By reducing this correlation, investors can reduce the volatility of your portfolio and gain protection against market downturns, a “hedge” to other market-linked investments.
Types of Alternative Investments
Private Equity
Private equity involves investing in private companies, often through venture capital or buyout funds. These investments are typically illiquid but can offer substantial returns when companies go public or are sold.
Hedge Funds
Hedge funds employ various strategies to generate high returns, including leveraging, short selling, and derivatives.
Professional fund managers manage hedge funs, and they are accessible primarily to accredited investors.
Real Estate
Alternative real estate investments include residential, commercial, and industrial properties. Investors can benefit from rental income, property appreciation, and tax advantages.
Real estate syndication and Real Estate Investment Trusts (REITs) offer attractive alternatives to real estate investing without the need to manage and maintain individual properties.
Commodities
Gold, silver, petroleum products, and agricultural commodities like soybeans, coffee, and oils hedge against inflation and traditional market trends.
Investing in commodities can be done directly through physical ownership or indirectly via futures contracts and commodity-focused funds.
Collectibles and Art
Collectibles—including rare coins, stamps, wine, and art—are tangible assets that can appreciate over time. These investments require specialized knowledge and can provide significant returns for knowledgeable collectors.
5 Key Benefits of Alternative Investments
Alternative investments offer numerous advantages for a high-net-worth portfolio:
1. Diversification
Alternative investments spread risk across different asset classes, stabilizing a portfolio and reducing the impact of market volatility. For example, real estate and commodities often move independently of stock and bond markets, offering a buffer during downturns.
2. Reduced Volatility
Alternative investments can reduce portfolio volatility by including less correlated assets with traditional markets.
When stocks and bonds are experiencing turbulence, alternative assets may remain stable or even appreciate. This stability can provide a smoother investment journey and protect against significant swings in value.
3. Potential for Higher Returns
Private equity, hedge funds, and venture capital often target high-growth opportunities that can yield substantial profits. While these investments come with higher risks, the reward can be significantly greater compared to traditional assets.
4. Exclusivity
Alternative investments provide access to exclusive markets and opportunities not available in public markets. By tapping into these unique opportunities, investors can diversify their portfolios and potentially uncover high-growth investments.
5. Hedge Against Inflation
Traditional investments are highly susceptible to inflation's value erosion. Alternative investments often tend to appreciate as inflation rises, helping to preserve the purchasing power of wealth.
How to Invest in Alternative Assets
Investors interested in alternative investments should take the following steps:
Identify Investment Goals
Before diving into alternative investments, investors should outline their financial goals. Some common ones include seeking high returns, diversification, income generation, or capital preservation.
Conduct Thorough Research
Alternative investments often require specialized knowledge. Conduct thorough research or consult with experts to understand the risks, benefits, and market conditions associated with different types of alternative assets.
Evaluate Your Risk Tolerance
Investing in alternative assets can often be riskier than investing in traditional investment vehicles like stock indices or treasury bonds. Investors should evaluate their risk tolerance and ensure they are comfortable with the potential volatility and illiquidity of these investments.
Diversifying within alternative assets can also help mitigate some of these risks.
Consider the Investment Horizon
Alternative investments typically require a longer investment horizon. Be prepared to commit capital for several years, as early exits can be challenging and costly, and ensure that the investment horizon aligns with any financial goals and liquidity needs.
Choose the Right Investment Vehicles
There are various ways to invest in alternative assets, including direct investments, funds, and syndications.
HNW individuals should choose the vehicle that best fits their goals, expertise, and risk tolerance. For example, real estate syndications allow investors to invest in larger properties with professional management, while private equity funds provide access to high-growth private companies.
Consult with Financial Advisors
Financial advisors who specialize in alternative investments can help HNW investors identify suitable opportunities, conduct due diligence, and structure their investments effectively.
Monitor and Adjust the Portfolio
It’s always wise for investors to monitor their investments and adjust their portfolios as conditions change and new opportunities appear. They can use online tools to monitor market trends and economic conditions that could impact assets.
Frequently Asked Questions
What are Alternative Cash Flow Investments?
Alternative cash flow investments are assets that generate regular income outside of traditional dividend-paying stocks and bonds. Property rental platforms like Airbnb, peer-to-peer lending, REITs, and syndications can improve your cash flow and diversify income streams. These typically include a dividend or income-generating component in addition to longer-term returns.
What are Passive Alternative Investments?
Passive alternative investments are those that require minimal management and active involvement from the investor, such as REITs, index funds focusing on alternative assets, and real estate syndications where a professional team manages the property. Investors can gain passive income from these alternative assets without committing to day-to-day oversight.
Are REITs Alternative Investments?
Yes, REITs (Real Estate Investment Trusts) are alternative assets that allow investors to gain exposure to real estate without directly owning the properties.
REITs are equities publicly traded on stock exchanges, providing liquidity. They often offer dividend income, making them especially attractive options for diversifying portfolios while generating regular income.
Conclusion
Investing in alternative assets can provide significant benefits, including diversification, reduced volatility, potential for higher returns, access to unique opportunities, and a hedge against inflation. You’ll gain a more well-rounded portfolio that is better protected from market fluctuations and poised to produce robust income with manageable risk.
For those looking to explore these benefits further, joining Long Angle can provide access to a network of experienced investors and advisors. Apply today to join a supportive community of accomplished peers.
Looking to expand your investment network?
Join Long Angle, a private community of high-net-worth investors. Together, we leverage our collective expertise and $30B in assets to access, diligence, and underwrite institutional quality alternative investments.
