If you’re an investor, you understand the importance of diversifying your assets, given that most mainstream investments have been beaten down by the global economic downturn witnessed over the last few years. Alternative investments refer to a broad category of assets outside the familiar investment options (stocks, bills and bonds, exchange-traded funds etc.). They cover everything from real estate, private equity and venture capital to annuities, hedge funds and commodities and are an excellent way to reduce risk by diversifying your portfolio.
Today, alternative investments are becoming more popular because institutional investors, such as endowment and pension funds, are allocating more money towards this class of assets to benefit from their long-term advantages.
Many countries have regulations liming this class to accredited investors as a protective measure. However, thanks to technological advancements, there are certain platforms through which investors can directly access alternative investment opportunities.
This article discusses six common options for investors interested in alternative investment:
- Private equity
Did you know that the number of private companies exceeds public companies by far and that these companies are open to investor capital? Private equity is a broad category that covers the investment in private capital markets and various private equity firms which concentrate on multiple investment strategies.
These firms raise capital and receive funds from institutional as well as individual investors, and these funds are then directed towards promising private companies. This capital will be returned to investors when an exit event occurs, e.g. acquisition or IPO, and the management will deduct a performance and management fee. This class includes investment in start-ups, venture capitalism and financing of private companies at all stages of the growth cycle.
- Real estate
While recent property busts can make investors wary of including real estate in their portfolio, you can still invest through real estate investment trusts (REITs) which offer unmatched risk management/mitigation options. These trusts have helped investors to receive returns amid volatile markets. Real estate does not shift according to movement of stocks and it has almost zero correlation with short-term bonds. Real estate is categorized by investment experts as a low-correlating asset, and not a no-correlating asset, but diversifying in real estate is still advised for investors. It’s an investment that require large capital to start, However with free debt calculator, One is able determine what it would cost to secure capital from the banks.
- Inflation-protected securities
Most markets today are haunted by slow economies and the threat of deflation, but if the past is anything to go by, the inflation spectrum, which is an investment return killer, eventually always returns. As such, making a small allocation to treasury inflation-protected securities (TIPS) can help lower risks of unanticipated price hikes and drops.
Just as with regular bonds, TIPS have a fixed rate of return, only that these returns are adjusted according to the rate of inflation and can therefore help offset losses which come about in stock trading when inflation is on the rise. Stocks and TIPS have a negative correlation, according to investment experts. In addition, TIPS investors can get more returns by investing in securities with longer-term maturity. You are still guaranteed easier rest than when buying conventional treasury bonds, which can be eaten up by inflation. With investment, inflation must always be considered as the realest risk factor.
Even though commodities are not common presently, over time, commodity investment can help to offset the volatility of stocks and bonds. The value of commodities increases with inflation and negatively correlates to stocks and bonds. Therefore, when bonds have consecutive negative returns, commodities are more likely to post positive returns. In addition, commodities perform best in periods when your portfolio needs the most help, during periods of high inflation, strife or unexpected market shocks. Because supply is threatened during this time, commodity prices will increase.
Commodities are excellent additions to portfolios to offset inflation risks. With them, you can invest in longer term bonds promising higher yields and offset the risk with commodities. If not, you’re better off investing in short to medium term bonds that have lower inflation risks.
- Fixed annuities
Annuities aren’t for everyone, but they can be useful for retirees wondering how they can make their shrinking portfolios last longer. Fixed annuities are basically contracts given by insurance companies to provide fixed payments until the end of the annuity holder’s life. They offer just about the best security against the peaks and troughs of investment returns during that period in retirement when you’ll be spending your hard-earned gains.
As a bonus, you can actually receive higher payments by placing a lump sum in annuities compared with placing the same in a 30-year bond, if you outlive the life of the bond. The obvious disadvantage is that if you die earlier, the asset is lost. But this is a risk worth taking, considering that you will not need the asset if you’re dead. But while you’re alive, no matter how long you’re alive, you’ll have something coming in, unlike other investment methods where the risk of outliving your money is ever-present.
- Stable-value funds
Stable-value funds are offered via retirement accounts, among them IRAs. They are a conservative investment option for investors that want slightly higher returns than those offered in the regular money market funds. Stable-value funds are more or less agreements between an insurer and issuer who agree to keep the value of the fund stable. As such, these funds have lower risk and volatility.
SVFs work by investing in longer dated bonds (usually between one and three years), that brings lightly higher returns than conventional money market funds which buy shorter-dated bonds. They can outperform one-month treasury bills by as much as 3.2 points annually. The risk is slightly higher, but only slightly.
A downside to SVFs is that they are not as transparent as regular MMFs. They can, for example, take more credit risks or bet with riskier bonds. As such, it is very important to invest with a highly-rated, experienced and reputable fund. A point of caution is that these funds perform well when interest rates are dropping, but they become less attractive once the interest rates start to rise.
These are just a few alternative investment options. As with all other business dealings, it is very important to deal with highly reputable and accredited investors for your alternative investment portfolio. Talk to an expert and decide which options will work best given the current state of your portfolio and your present and future investment goals.
The author is a qualified investment expert with many years’ experience in handling business investments as well as providing additional financial services such as the free debt calculator.