Alternative Investments 101

Alternative Investments: An Overview

The term “alternative” refers to investments that 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 these assets. Alts tend to be complex, lightly regulated, and less transparent than other asset classes.

In addition, investors should bear in mind that alts can differ widely from one another in terms of their structure, fees, liquidity, tax treatment, 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 stock market performance, and thus they may 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, 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, trading currencies directly can be quite 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 with retail investors in mind.

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 vehicles (including some retirement accounts), 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 investments.