13 Dec 2022
Alternative investments offer opportunities and advantages, especially as part of a long-term strategy and particularly in volatile markets.
Alternative assets are investments that fall outside of the typical stocks, bonds, mutual funds, and ETFs (exchange-traded funds). They range from venture capital and hedge funds to private equity funds, precious metals, collectibles, art, wine, and more. Investors search for alternative assets to add more diversification (1) to their portfolio, as well as income generation, and the possibility of higher returns.
Alternative assets look attractive in volatile markets when traditional asset classes are struggling. However, alternative investments aren’t for everybody. Many are unregulated and limited to high-net-worth individuals. Others require some level of expertise, or at least interest and willingness to learn.
Three types of alternative assets that might be familiar are private equity, venture capital and hedge funds. Let's dive into each one.
Private equity involves investing in private companies outside of the public stock market. This type of investing is typically reserved for accredited investors and institutional investment firms. Private equity investing has the potential for higher returns but investors are exposed to increased risk and long lock-up periods. Private equity investments are long-term, with investor money often held in the fund for as long as ten years. The money becomes available again after a sale of holdings, initial public offering, or merger.
Venture capital supports new companies as they work to commercialize their innovations. Investors are exposed to higher risk, but venture capital holds more potential for greater returns than more traditional investing. Like with private equity, the funds are locked until an event like an acquisition or IPO. Money is collected from limited partner investors in increments as needed, which is referred to as “capital calls.”
Hedge funds typically trade on the public markets but employ short-selling, leverage, and other strategies that most investors don’t have access to. Hedge funds are also typically limited to high-net-worth individuals and entities that are designated as accredited investors or qualified purchasers.
Geopolitical risks have traditionally had more impact on bonds, equities, and mainstream commodities like oil than on alternative investments like fine wines, watches, or digital currencies (2). In a world where uncertainty outweighs stability, it’s no surprise that more investors are looking to alternative investments for diversification and market outperformance.
Investors interested in alternative assets are wise to be prepared for risk, however. Case in point: cryptocurrencies. Considered a digital asset rather than a real currency, cryptocurrency was breaking records in 2021. The cryptocurrency market hit a peak in November 2022, but just 7 months later had lost nearly $2 trillion in value (3). It’s a cautionary investing tale, but some investors are willing to take the risk.
Ultimately, alternative investments can offer opportunities and advantages, especially as part of a long-term strategy and particularly in volatile markets.
Alternative investments can offer diversification, boost returns, and generate income. Thanks to interest rate hikes, recession fears, and other uncertainties, alternative assets are part of many investors’ investing strategies.
Most investors who are already investing in alternative assets plan to continue investing in them, with 96 percent of people allocating investments anticipating they will either increase (55 percent) or maintain (41 percent) their exposure to alternatives over the next three years (4).
Alternative assets are key to many diversification and income-generation strategies. Because alternative investments don’t correlate with the stock market, they can help to limit volatility. In many cases, alternative investments can even offer a higher return, especially with markets in flux. Higher returns are possible in part because alternative investments have additional tools that traditional securities don’t, such as leverage, derivatives, and short selling.
Alternative investments offer other benefits including a greater sense of anonymity, flexibility, protection against inflation and market crash, and an opportunity for investors to use and finesse expertise about specific investments (precious metals, for example).
For investors interested in the nontraditional—and who are open to more risk and have the means to explore them—alternative assets can be an excellent complement to traditional investments in a diversified portfolio.
Investors interested in alternative assets can travel the world to collect, engage in venture capital opportunities, or look for investments in commodities like gold, but those can not only be expensive but expose investors to risk. Investors interested in income generation or diversification as a strategy can also search on Magnifi for funds that provide exposure to these opportunities:
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This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. Investors should carefully consider the investment objectives and risks as well as charges and expenses of all innovation-related securities before investing. Read the prospectus carefully before investing. ETFs and mutual funds are actively managed and there is no guarantee that the manager’s investment decisions will produce the desired results. All investments involve risks, including possible loss of principal. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and fund expenses will reduce returns. You should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Download a summary prospectus and/or prospectus, which contains this and other information and read it before you invest or send money.