The term “alternative” doesn’t mean alts exist on the fringes of the financial world. They are alternatives to conventional strategies – not necessarily substitutes for them. To invest wisely in alts, it’s important to consider the potential risks and benefits of the many types of these assets. Alts tend to be complex and can be high risk, and assets can differ widely from another in terms of their structure, fees, liquidity, tax implications, and more.
Real estate is a common type of alternative investment because real estate values tend not to correlate with the stock market, so they can provide a potential buffer against volatility. You can invest in various types of properties directly, or buy shares of publicly traded Real Estate Investment Trusts (REITs), as well as mutual funds and ETFs that provide access to this asset class.
Commodities are physical assets (e.g. precious metals, raw materials like oil and gas, and agricultural products) that are used in manufacturing. Owing to the relatively steady demand for most commodities, these can be a hedge against inflation. That said, demand for different commodities can fluctuate — and commodities can be vulnerable to environmental and political risks. Investors can access commodities via commodity stocks, mutual funds, and ETFs.
Foreign currency investing, often referred to as forex, is one of the largest and most liquid global markets. Forex trading offers the potential for diversification and tends to cost less than other types of alts. That noted, currencies can be volatile, and investors may prefer the relative stability of mutual funds or ETFs that still provide exposure to foreign currencies.
Private equity provides investors with an opportunity to own a stake in smaller and early-stage companies that need capital to regain their footing, make a profitable pivot, or (in the case of venture capital) get off to a strong start. As such, the risks of many PE and VC projects tend to be high — although there is also the potential for substantial profits when companies succeed. High investment minimums have made it difficult for retailers to access these investments, but that has been changing as more private equity funds are designed for retail investors.
Although the alternative space was largely off limits for most ordinary investors until recently, alternative investment options are rapidly evolving to provide lower-cost, more liquid choices for retail investors through accessible mutual funds, ETFs, and other structures, many of them offered by well-established asset managers. As always, investors need to do their due diligence to understand the potential pros and cons of these vehicles.