To broadly put it Alternative investments are non-traditional investments, in assets which are different from Stocks, Bonds, and Commodities. Alternative investments usually include, Hedge Funds, Private Equity, Real Estate, Assets, Rare Assets, Wine and Art, commodities and derivatives contracts. Institutional investors or high net worth individuals, generally who are accredited, mostly hold these alternate investment assets, the restriction is due to their complex nature and regulations requirements of the investments. Alternate Investment assets usually perform slow when compared to bonds and stocks, it may also be difficult to put a value to the alternate investment asset, and hence are generally more illiquid than the traditional form of investments.
Alternate investments are getting popular of late more so because the institutional investors are willing to invest in it, as they see the long term benefit of this asset class. Most alternative investments have, greater minimum investments when compared with that of mutual funds or ETF’s (exchange traded funds).
Consider this what is more difficult to sell, 50 Apple Mac books or one bottle of 70-year-old wine. It is then understandable that these alternate investment assets have a lower liquidity when compared to other assets. In fact, at times investors find it challenging to even accurately value their investments due the unique nature of transactions.
Due to these factors there is a risk element of frauds and scams attached to alternative investments due to the unregulated nature. It then becomes imperative for investors to conduct extensive due diligence.
Let us try to understand the alternative investment landscape
Hedge Funds, these are usually the most common types of alternative investments. To simply put it, a pool of investors come together and integrate their funds, typically less than 10% to alternative investments, with the assistance of a manager, who then positions their investment, with an effort to achieve massive or greater returns, that exceeds a certain milestone.
Again the point to ponder is that these alternative investments are illiquid in nature, so if you are seeking liquidity, then hedge funds are not the right kind of investment.
Alternative investment assets usually have a high fee on investment. However, the transactional cost is much lower when compared to conventional assets, purely because even the turnover is low. Alternative investments are long term in nature, due to which the Tax Benefit is higher when compared with the short term investments.
Exchange Traded Funds prove great prospects to invest in alternate investments assets which were difficult to consider in the past. As most retail investors had limited availability to opportunities of investing in real estate, precious metals etc…, ETF’s gives the exposure to alternative assets.
Depending on your capability, objective of investment, tax implications, and for diversification in your portfolio, one can consider investing in the alternative assets. A detailed discussion with the financial advisor is imperative before venturing into alternative investments as there are risks that needs to be factored. Be informed and take a wise decision, as results are exciting if invested appropriately in alternative assets.
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