What are alternative investments?
In simple terms, alternative investments, otherwise known as alternative assets, are financial assets that sit outside the three traditional forms of investments being stocks, bonds or cash. For this reason, they are typically not as easily accessed by most individual investors. Alternative investments can offer an astute investor the benefits of greater portfolio diversification and lower overall risk. Not to mention the potential for above market returns.
Alternative assets are particularly suited to long term investment strategies and wealth building, even during times of market volatility. Less well-known it is important for investors to understand the complexities and associated risks and returns that alternative assets can offer. As a result investors can determine if the risk and return profile is the right fit for their overall investment strategy.
The difference between traditional and alternative investments
Traditional investments
Traditional investments including stocks, bonds or cash investments can be bought, sold or traded on public markets; for example stock markets such as the Australian Stock Exchange. More liquid, they can be turned into cash more easily and are heavily regulated and monitored by financial authorities.
Alternative investments
Unlike traditional investments, alternative investments cannot be bought, sold or traded on public markets. Considered illiquid, they are often more complex and are not heavily regulated. Due to the lack of regulation, it is vital to invest with an investment manager who provides transparency into their investment holdings, selection process and ownership structure. Alternative investments come with the potential for a higher return and behave differently to traditional investments, therefore offering investors diversity in their risk profile. Alternative assets can fill a large gap in an investor’s portfolio that might previously have been filled by income earned through interest from cash investments.
The 7 most common alternative asset classes
Whilst alternative assets may not suit every investor, they continue to grow in popularity with many investors generating lower investment returns due to the prolonged low interest rate environment. Due to their more complex structure, they are typically most attractive to wholesale and high net worth investors. The most common alternative asset classes are:
Private Equity
Refers to investments into private companies that are not publicly traded or listed on a stock exchange. Here the goal is to either help new companies grow by providing capital or assist existing companies restructure to overcome internal inefficiencies and generate long term profits.
Venture Capital
Refers to investments into start-up companies with high growth potential. Venture capital investments focus on building a company up with the intention to eventually sell the company through either an initial public offering or acquisition/merger.
Hedge Funds
Hedge funds are investment funds that have the ability to invest into a diverse range of assets and industries. Most hedge funds invest across real estate, stocks, derivatives and currencies.
Private Debt
Investment into Corporate Entities, Real Estate or Assets in the form of debt. Debt investments are not financed by banks or traded or issued in open markets.
Real Estate
Acquisition, development or ownership of real estate assets by private investment avenues, unlisted real estate funds or firms. The three main classes of real estate investments are residential, commercial and industrial.
Infrastructure
Hard assets that provide services or facilities considered essential in the economic development of society. Including energy, logistics, telecoms, transport, utilities and waste management.
Natural Resources
Investment into the development, enhancement or production of various types of natural resources. This includes materials or substances that occur naturally on Earth. Includes agriculture, renewable energy, timber, water and metals.
The role alternative investments play in a diversified portfolio
Although there has been a wholesale shift toward alternative assets by institutional investors, many Australians are still limited in the ways they access these types of investments. As a result, they tend to have a significant concentration in stock, residential property and cash investments. In many cases this may be hindering their ability to build long term wealth.
In our next article, we will explore how investing into alternative assets can improve and enhance your portfolio diversification and how you can gain access.
Remara is an Australian focused alternative asset manager with active strategies in Private Credit, Real Estate and Tactical opportunities (Private Equity, Venture Capital & Hedge Fund). Our philosophy is to develop and implement long term strategies for investing in quality alternative assets. In turn providing investors access to high conviction opportunities.
