Alternative investments refer to assets and strategies outside of traditional asset classes like stocks, bonds and cash. They can provide portfolio diversification and help manage risk. Some popular alternative investments include private equity, venture capital, hedge funds, managed futures, real estate, commodities and collectibles. Investing in alternatives requires thorough research as they tend to be complex, risky and have high costs. This article provides an introductory guide to the main types of alternative investments and how individual investors can gain exposure to them.
Private equity and venture capital provide exposure to young companies
Private equity refers to investing in private companies not listed on public exchanges. It includes late-stage venture capital, which provides funding for more established startups. High minimums put private equity out of reach for most individual investors. But they can get exposure through funds of private equity funds or by investing in publicly traded private equity firms like Blackstone and KKR.
Hedge funds make use of short-selling and leverage
Hedge funds aim to generate returns and reduce risk through flexible investment strategies like short-selling, leverage and derivatives. Their high fees and minimums also make them hard to access for individuals. Options include funds of hedge funds, managed accounts at minimums around $100k, and public hedge fund ETFs.
Managed futures offer portfolio diversification
Managed futures funds trade futures contracts in areas like currencies, interest rates, agricultural commodities and metals. Since they have low correlation to traditional assets, managed futures can provide portfolio diversification. Individuals can invest in commodity trading advisors directly or through publicly traded managed futures ETFs.
Real estate investment trusts simplify real estate investing
Real estate investment trusts (REITs) allow individuals to invest in real estate without having to buy, manage or finance properties themselves. REITs own and operate real estate and trade on major exchanges like stocks. They must pay out 90% of taxable income as dividends. REIT ETFs further simplify real estate investing.
Commodities ETFs and futures allow investing in raw materials
Commodities like agricultural goods, metals and energy products have appeal as an inflation hedge. But buying physical commodities has storage and transportation challenges. Commodity ETFs and futures contracts allow exposure. But futures require closer monitoring than stocks and have unique tax treatment.
Alternative investments like private equity, hedge funds, managed futures, REITs and commodities can enhance portfolio diversification. But they carry unique risks like illiquidity, complexity and high costs. Thorough research and moderate allocation is key for individuals looking to add alternatives.