6 Best Alternative Investments in 2023
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Due to the volatile stock market, many investors look for safer methods to invest their money. As a result, alternative investments have grown in popularity. According to most financial experts, alternative investments are best employed to diversify financial portfolios. Many of these alternative investments have attracted the attention of high-net-worth individuals and institutional investors, such as private endowments. This is because many alternative investments need a higher initial commitment than stocks or bonds.
Despite how expensive it is, it doesn’t stop people from investing in them. And I’m sure that’s the reason you are here. You want to find out which alternative investments are worth buying this 2022. Don’t worry; we’ve got you covered. In this article, you’ll know the six (6) best alternative investments to buy, the risks involved, and how to buy them.
6 Best Alternative Investments in 2023
#1. Hedge funds
Hedge funds are pooled investment funds used to trade in somewhat liquid assets. To increase performance, they can use more complex portfolio construction and risk management approaches, such as short selling, leverage, and derivatives.
Hedge funds are actively managed alternative investments that employ non-traditional and hazardous asset classes or investing strategies. They have substantially higher fees and deposit requirements than traditional investment funds. Hedge funds have increased by about 2.5 percent in the last five years, yet they remain controversial.
Now, why should you invest in hedge funds in 2023? Rising interest rates benefit hedge funds. Hedge funds have historically outperformed most other asset classes in absolute return, with fixed income performing the poorest. Another reason to choose hedge funds is that more differentiated markets necessitate more sophisticated tactics, and hedge funds are more adaptable and focused on the performance of specific companies. Their alpha generation often increases during these times due to the greater number of trading possibilities available to them.
One more reason to invest in hedge funds is that hedge funds have lost less than the entire market every year that the S&P 500 has declined. Hedge funds have also been able to recover faster than equity markets due to their ability to restrict losses. What are you still waiting for? Hurry up and invest now.
#2. Private Equity Funds
A private-equity fund is a collective investment scheme that invests in various Asa securities using one of the private equity investment methodologies. The majority of private equity funds are limited partnerships with a 10-year duration.
Private equity funds are pools of capital that will be invested in businesses that offer a high rate of return. They have a set investment horizon after which the private equity firm aims to exit the venture profitably. IPOs and the sale of the company to another private equity group or a strategic bidder are examples of exit options.
Companies and startups benefit from private equity in a variety of ways. Companies choose it because it provides liquidity as an alternative to traditional financial processes such as high-interest bank loans or public market listings. De-listed companies can also use private equity financing to pursue unconventional growth strategies away from the scrutiny of public markets. Private equity businesses are masters of value creation. Over the last 20 years, private equities have outpaced equities by 4% in the United States.
#3. Venture Capital Funds
Venture capital is one kind of private equity investment offered by venture capital firms or funds to startups, early-stage, and developing businesses with excellent growth potential.
The most common venture capital sources are affluent individuals, investment banks, and other financial institutions. It does not always have to be money-related; it can be in the form of technical or managerial abilities. Venture money is typically offered to small enterprises with high growth potential or that have expanded quickly and are ready to grow.
Long-term money is not ventured capital. The goal is to invest in a company’s balance sheet and infrastructure until it grows large enough and credible enough to be sold to a corporation or offered liquidity via institutional public-equity markets.
#4. Fund of Funds
A “fund of funds” is an investment that involves managing a portfolio of different investment funds rather than investing directly in stocks or other traditional investment options. This type of investment is referred to as multi-manager investing. The fund of funds (FOF) investing strategy can be conceived as a “portfolio” of various funds. Hedge funds, mutual funds, private equity funds, and other fund types are frequently invested by the fund of funds (FOF) managers.
Multi-manager funds, gold funds, foreign funds, and asset allocation funds are just a few examples of different funds that operate at varying risk levels to meet investors’ needs and risk profiles. If the investor’s primary goal is to earn large returns, the fund of funds will invest in mutual funds that give high returns but also have a higher risk, and vice versa.
When it comes to investing your money, a fund of funds is a safe bet. Diversification of your investment across numerous funds from various industries and rigorous professional management by skilled fund managers ensures that your investment is protected from danger.
Furthermore, the fund of funds’ collective investment strategy allows you to invest in some of the best-performing mutual funds even if you have a small budget. There will also be no capital gain tax for the investor when the fund management rebalances the fund of funds between equities and debt.
#5. Natural Resources
Natural resources include items such as water, which is frequently used in daily life. Commodities, for example, can grow in price even while the markets are declining during economic downturns.
Natural resource private investment began as an extension of the private equity and infrastructure asset classes, eventually establishing itself as a distinct asset class. While structured financial instruments have struggled to recover since the Great Recession, natural commodities have risen in price, making them an appealing investment alternative.
Companies that extract commodities such as coal, metallic ore, sand, gravel, and oil shale make up the natural resources industry. Natural resources operate as value stores, especially when inflation or currency devaluation is high. Mutual funds are one method to get into this market.
Fidelity Select Chemicals Portfolio, ICON Natural Resources and Infrastructure Fund, BNY Mellon Natural Resources Fund, T. Rowe Price New Era Fund, and Allianz Global Water Funds are among the most popular natural resource mutual funds.
#6. Real Estate
Real estate is popular because it provides income (rents) and appreciation (when you sell appreciated property for a profit). As an asset that is more vulnerable to diverse impacts than stocks and bonds, it’s also an excellent strategy to diversify your portfolio. There are plenty of advantages to investing in real estate. Investors can enjoy consistent income flow, good returns, tax advantages, and diversity with well-chosen assets, and real estate can be used to grow wealth.
Aspiring real estate investors can purchase a home by taking out a loan, paying a percentage of the entire cost ahead, and repaying the remainder over time. One of the common ways for real estate investors to profit is to become the landlord of a rental property. Flippers can make money by purchasing undervalued real estate, renovating it, and reselling it. Real estate investment clubs offer a more hands-off approach to real estate investing.
Real estate investment trusts (REITs) are another way investors can make money from real estate. A REIT is a firm that owns, operates, or funds income-producing real estate. REITs provide investors with a consistent income stream but little in the way of capital appreciation.
The majority of REITs are openly traded like stocks, making them highly liquid. Apartment complexes, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses are among the forms of real estate that REITs invest in.
What is an Alternative Investment
Any asset class other than stocks, bonds, and cash is considered an alternative investment. The phrase is broad, encompassing tangible things like precious metals, collectibles, and even financial assets.
A financial asset that doesn’t fall into one of the traditional investment categories is an alternative investment. Stocks, bonds, and cash are all common types. Examples of alternative investments include private equity funds or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Alternative investments are frequently used to describe real estate.
Thanks to their complexity, lack of regulation, and high risk, most alternative investment assets are owned by institutional investors or accredited, high-net-worth individuals. Although many alternative investments have high minimum investment requirements and fee structures, transaction costs are often lower than those of traditional assets due to lower turnover.
Even when they don’t contain unique goods like coins or art, alternative investments are vulnerable to scams due to a lack of regulation. As a result, while exploring alternative investments, investors must do considerable due research. Alternative offerings may only be available to accredited investors in some situations.
Advantages of Alternative Investments
Alternative investments have numerous advantages. The first one is diversification.
One of the main reasons investors are interested in alternative assets is diversification. Diversifying outside the public markets and generating returns from a diverse range of uncorrelated, non-public assets is a major aspect of minimizing risk and volatility in a portfolio. Because alternative investments have a low connection to traditional stock and bond allocations, diversifying via them can help decrease overall portfolio risk. For example, if the stock market falls, select alternative assets that may stay steady or even appreciate to assist hedge your portfolio.
Direct ownership is another advantage of alternative investments. Unlike traditional investments, any alternative asset you invest in is directly owned by you, where you’re only buying a paper asset, which is the discounted value of future expected earnings. You don’t really own anything in traditional investments. Being a direct owner means you can closely manage your investments and take better care of them.
The potential for higher returns is one more reason to invest in alternative assets. Alternative investments have the potential to outperform public market investments. Consider private equity, which has beaten the S&P 500 by more than 70%. Investing in assets with more credit risk, greater liquidity risk, additional leverage, or more complicated or nuanced assets than standard public investments could result in better returns.
Alternative investments may also provide substantial tax advantages. Many alternative investments allow you to keep more of your profit due to their structure. In many private alternative investments, you become a part-owner of the fund or syndication, and the tax benefits are transmitted to you directly.
Despite the numerous advantages of alternative investments, they still come with risks. Let’s have a look at some of them now.
Risks of Alternative Investments
The very first risk involved with alternative investments is the lack of regulation. Alternative assets are not all regulated because they are not all registered with the SEC. They do, however, fall under the Dodd-Frank Act’s purview, and their conduct may be scrutinized by the SEC.
Another thing these investments lack is transparency. There are few public regulatory filings because most alternatives are not regulated by the SEC. As a result, investors have a scarcity of information.
Liquidity is also a risk. It may not be easy to buy or sell alternative investments because many are not publicly traded. Many hedge funds and private equity funds include lockups, which bind investors to a specific investment term during which no redemptions are permitted.
Furthermore, because alternative investments are not designed for the average investor, minimum investment requirements can be unreasonably large. With huge potential gain comes greater risk. Risky tactics like short selling or trading sophisticated derivatives may be used in many alternative investments.
How to Buy Alternative Investments
There are three ways investors can buy alternative investments:
#1. Investing in a fund
These could be hedge funds, mutual funds, or fund of funds. Start by choosing whether you’d like to be active or inactive. Professionals oversee actively managed funds, examining the market and buying to outperform it. On the other hand, passive investment is becoming increasingly popular, given the simplicity of the method and the returns it may produce. Fees are often lower in passive investing than in active investing. Determine your budget before deciding where to invest your cash.
#2. Investing directly in a company or project
These are private equity funds. Investing in privately held companies can be more complicated than in publicly traded ones. Investors have significantly fewer options for investing in companies that have not yet gone public. Traditionally, investing in private companies required you to deposit your money into private equity or venture capital funds. These funds frequently outperform the market by investing in some of the best-performing assets.
#3. Co-investment in a fund’s portfolio company
A co-investment is a kind of investment in a specific transaction made alongside, but not via, a main private equity (PE) fund by limited partners (LPs). This is frequently accomplished by using a separately structured co-investment vehicle governed by its own set of agreements.
Co-investments appeal to both PE funds and limited partners for a variety of reasons, including providing additional capital to PE funds, allowing PE funds to make larger single investments that would otherwise be unavailable or undesirable, and providing LPs with increased diversification and a larger share of desirable investments, among others.
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Conclusion: Alternative Investments
Now that you have understood everything there is to know about alternative investments, keep one thing in mind. Alternative investments are not for everyone. We mentioned this earlier, and we’re iterating because it is imperative. As profitable as they are, only a select few should try investing in alternative assets.
In some respects, alternative investors differ from public markets such as equities, bonds, and mutual funds. Instead of a prospectus, investors are given a private-placement memorandum of understanding, which specifies the fees, liquidity, and type of investment.
Although alternative investments lack transparency, investors can nevertheless compare the performance of various funds. A standard benchmark like the S&;P 500 would not be used by investors.
Most consumers obtain alternative assets through a financial institution or a financial counselor. However, emerging digital platforms are beginning to offer direct purchasing options. It’s still ideal for new investors to work with a professional who understands the asset class, its merits, and drawbacks.
Private equity, venture capital, private debt, hedge funds, real estate, commodities, and fund of funds are the most common alternative investment kinds.
Alternative Investments FAQs
Are alternative investments a good idea?
Yes, they are. They are great for diversifying your investment portfolio, and they offer higher returns than traditional investments. However, they require more initial capital, and there are no rules in place to regulate them, so tread carefully.
What are the best alternative investments?
Some of the best alternative investments are private equity, venture capital, private debt, hedge funds, real estate, commodities, and fund of funds. You can also invest in collectibles such as wines, art, antiques, etc. There are so many to choose from.