What are alternative assets?
It is common to hear about “alternative assets” in financial circles today, but not everyone knows what is included in that grouping. Arlast Capital itself is technically an alternative asset manager in real estate although REITs now offer a public option for investors. Traditionally, investors were offered the “conventional” asset classes of stocks, bonds, and cash. These assets were public, liquid, and highly regulated. Alternatives were more commonly tools of large, sophisticated investors such as pensions funds and endowments which sought diversification. Alternative assets have lower correlation with stocks and bonds, which can make them valuable tools for risk management. We will touch on eight examples of current alternative assets, though new asset classes may develop over time.
What are examples of alternative assets?
- Real Estate: Real estate is perhaps the best-known alternative asset and involves purchasing residential, commercial, or industrial property. This asset class generates steady income through rents and potential capital gains through property appreciation. Real estate investments also feature benefits such as inflation protection and tax advantages.
- Collectibles: Collectibles include art, wine, antiques, vintage automobiles, rare currency, baseball cards, and other items that can be stored and resold for a higher price. Although this category can provide meaningful returns, it requires specialized knowledge to assess the value and authenticity of items. The market for collectibles is volatile, but for specialist investors, it presents an opportunity to combine a personal passion with investing.
- Cryptocurrency: Cryptocurrencies such as Bitcoin and Ethereum represent a newer asset class consisting of digitally generated tokens that act as a store of value and means of exchange. The digital currency market is still evolving, and investors should be prepared for a high-risk environment with considerable price fluctuations.
- Commodities: Commodities are physical goods such as oil, precious metals, foreign currency, and agricultural products. These items act as a hedge against inflation and currency devaluation. Commodities are influenced by market demand, geopolitical stability, and changes in currency values, distinguishing their returns from more traditional assets.
- Hedge Funds: Hedge funds employ a multitude of strategies to achieve returns, such as leverage, derivatives, and short selling. This is differentiated versus the traditional long-only mutual funds. Hedge funds involve higher fees and often require a sizable minimum investment, but they can yield a different return profile.
- Private Equity: Private equity is simply purchasing ownership in companies not listed on a public exchange. This could be funding new startups, participating in leveraged buyouts, or pursuing a turnaround of an existing business. Private equity investments are typically illiquid and require a longer commitment.
- Private Debt: Private debt consists of loans that are not issued or traded in public markets. Investing in private debt allows individuals to act as lenders to companies. Peer-to-peer lending is also a form of private debt.
- Structured Products: Structured products are complicated instruments that include derivatives based on securities, options, indices, commodities, debt issuances, or foreign currencies. Examples include credit default swaps, collateralized debt obligations, and mortgage-backed securities. These products are created by investment banks for specific risk-return objectives and provide an opportunity for portfolio customization.
If you are interested in hearing about how real estate can help diversify your portfolio, contact Arlast Capital and one of our team members will help explain the differences between asset classes.
