Alternative Investments 101
SoFi’s Alt Investment Guide for Beginners
Alternative investments — those that fall outside the realm of conventional securities like stocks and bonds — are capturing investors’ attention. Thanks to their low correlation with traditional asset classes, these investments (commonly known as alts) increase portfolio diversification, which may help offset certain risk factors and improve risk-adjusted returns.
Alts include a range of assets including commodities, art, and collectibles, as well as alternative strategies such as investing in derivatives, real estate, venture capital, and more.
Because alts tend to be highly complex, fairly illiquid, and potentially high risk, these investments were historically accessible only to high-net-worth investors. However, that’s changed in recent years as alts have become increasingly available to everyday investors through mutual funds, ETFs, and even some types of IRAs. This guide provides a comprehensive overview of some of the most common alternative investment choices.
Alternative Investments: An Overview
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.
Ways to Invest in Real Estate Funds
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.
Exploring Commodity Funds
Commodities are raw materials (e.g. precious metals, oil and gas, and agricultural products) that are used in manufacturing or for consumption. 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.
The World of Foreign Currency Funds
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 provide exposure to foreign currencies.
Overview of Private Equity and Venture Capital Funds
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 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.
Understanding Private Credit
Private credit is a form of lending from non-bank financial institutions. Sometimes called direct lending or private debt, private credit allows smaller companies to seek financing via channels outside of traditional bank loans.
Private credit can be a boon to businesses by supplying much-needed capital. And, as a type of alternative investment, it can create opportunities for investors who pool funds in order to issue loans — which in turn generate income for investors through interest payments. Private credit may utilize a range of strategies, each with its own risk and reward factors, so it’s important to understand the structures involved.
New Vehicles for Alternative Investments
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 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.
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