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What is an Alternative Investment?

In a world of volatile stock market and financial uncertainty, diversifying your investment portfolio is more crucial than ever. A fresh wave of investors, particularly among the younger generations, is veering away from the traditional stocks and bonds and venturing into alternative assets. According to a survey conducted by Lansons (USA Today), less than 10% of the entire American population has invested in alternative assets, but there is a more significant interest among the younger generations, with 30% of Gen Z and 25% of millennials either investing in such assets or possessing knowledge of platforms that facilitate these investments (Yahoo Finance).

Alternative investments encompass a diverse range of assets beyond typical stocks, bonds, and cash, including real estate, private equity, cryptocurrencies, and commodities like gold and oil. Although these investments may be perceived as riskier and less liquid, they offer the potential for higher returns and are generally considered strong hedges against inflation (Yahoo Finance).

Types of Alternative Investments

1. Real Estate: Real estate investments involve purchasing properties, either residential or commercial, with the expectation that they will increase in value over time. Investors can could earn returns through rental income and capital appreciation as if property values increase. Real estate investments can be made directly by purchasing properties or indirectly through real estate investment trusts (REITs) or online fractional real estate platforms like Concreit.
2. Private Equity: Private equity involves investing in private companies or buying out public companies to make them private. Investors in private equity typically invest in a private equity fund managed by a private equity firm. These funds invest in a portfolio of private companies, and investors earn returns as the value of these companies increases. Private equity investments offer the potential for high returns but come with higher risks and illiquidity.
3. Hedge Funds: Hedge funds are investment funds that use various strategies to earn returns for their investors. These strategies may involve investing in equities, bonds, derivatives, currencies, and other asset classes. Hedge funds may also use leverage and short selling to enhance returns. Hedge funds are typically open to accredited investors only and have higher fees than traditional mutual funds.
4. Commodities: Commodities are physical goods such as gold, oil, and agricultural products that are traded on commodity exchanges. Investing in commodities involves buying and selling commodity futures contracts or investing in commodity-focused exchange-traded funds (ETFs) or mutual funds. Commodities offer a hedge against inflation and diversification benefits as they have a low correlation with traditional stock and bond markets (Investopedia).
5. Art and Collectibles: Art and collectibles involve investing in art, antiques, coins, and other collectibles with the expectation that their value will increase over time. These investments offer the potential for capital appreciation but come with higher risks and illiquidity. Investing in art and collectibles may require specialized knowledge and expertise.
6. Cryptocurrencies: Cryptocurrencies are digital or virtual currencies that use cryptography for security. The most well-known cryptocurrency is Bitcoin, but there are thousands of other cryptocurrencies available. Investing in cryptocurrencies involves buying and holding the cryptocurrencies or trading them on cryptocurrency exchanges. Cryptocurrencies offer the potential for high returns but come with higher risks and volatility.
7. Structured Products: These usually involve fixed income markets and derivatives. Examples include credit default swaps (CDS) and collateralized debt obligations (CDO). Structured products can be complex and sometimes risky investment products but offer investors a customized product mix to meet their individual needs.

How to Invest in Alternative Investments

Investing in alternative investments can be complex and may require specialized knowledge and expertise. However, there are various ways to invest in alternative investments, depending on the type of investment and your investment objectives:

1. Private Equity: Investors can invest in private equity through private equity firms, venture capital funds, or crowdfunding platforms. These firms and funds pool money from multiple investors to invest in private companies or a group of companies.
2. Private Debt: Investors can invest in private debt through private debt funds or direct lending platforms. These funds and platforms pool money from multiple investors to lend to public or private companies.
3. Hedge Funds: Investors can invest in hedge funds by directly investing in a hedge fund managed by a hedge fund manager. Hedge funds are usually open only to accredited investors or institutional investors.
4. Real Estate: Investors can invest in real estate by buying properties directly, investing in Real Estate Investment Trusts (REITs), or investing in real estate crowdfunding platforms. Platforms like Concreit allow retail investors to invest in a diversified portfolio of real estate properties with low minimum requirements.
5. Commodities: Investors can invest in commodities by buying commodities directly, investing in commodity futures contracts, or investing in commodity-focused ETFs or mutual funds.
6. Collectibles: Investors can invest in collectibles by purchasing and maintaining physical items such as art, wine, vintage cars, stamps, coins, etc., with the hope that their value will appreciate over time.
7. Structured Products: Investors can invest in structured products through financial institutions or brokers that offer these products. Structured products are usually customized to meet the individual needs of the investor.

Advantages and Disadvantages of Alternative Investments

Alternative investments often come with their own set of benefits and challenges. Below, we discuss some of the key advantages and disadvantages of alternative investments.

Advantages of Alternative Investments

1. Diversification: One primary reason for the growing interest in alternative investments among younger investors is the desire for diversification. Given the increased volatility in the stock market and the potential for substantial losses, spreading risks across different asset classes becomes an appealing strategy (Yahoo Finance).
2. Potential for Higher Returns: A study by Bank of America reveals that 75% of Americans aged between 21 and 42 doubt the possibility of achieving above-average returns solely through traditional stocks and bonds (Yahoo Finance).
3. Hedge Against Inflation: Alternative assets, including real estate, gold, and fine wine, are generally considered strong hedges against inflation (Yahoo Finance).
4. Positive Impact on Society: Beyond economic motivations, social and cultural factors also play a role in the appeal of alternative investments among young individuals. Alternative investments like impact investing and socially responsible investing allow young investors to align their financial choices with their values, aiming to create positive change while pursuing their financial goals (Yahoo Finance).

Disadvantages of Alternative Investments

1. Higher Fees and Transaction Costs: Alternative investments often come with higher fees and transaction costs compared to traditional investments.
2. Higher Risk: Alternative investments are generally associated with higher risks due to their complex nature, lack of regulation, and degree of uncertainty.
3. Lack of Regulation or Transparency: Regulations for alternative investments are less clear than for traditional securities, and most alternative investment vehicles are only available to institutions or wealthy accredited investors.
4. Illiquidity: Alternative investments are generally less liquid than traditional investments, meaning it may be difficult to sell them quickly at market value.

Real Estate as an Alternative Investment

Investing directly in real estate can mean buying, selling, and maintaining a collection of properties, which is can be expensive and time-consuming. Many people already have exposure to real estate through owning a home. For most investors, this, plus an investment in a broad portfolio of stocks and bonds, which can include real estate investment trusts (REITs) and mortgage-backed securities, offers plenty of exposure to real estate (Vanguard).

However, the emergence of user-friendly online platforms like Concreit has democratized the investment landscape, making it more accessible for young investors to delve into alternative assets, including real estate. Now, virtually anyone with an internet connection can explore and potentially invest in alternative assets (Yahoo Finance).

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Data Sources:

• Yahoo Finance: Young, Rich Americans Don't Trust the Stock Market, So They're Turning to Alternative Assets to Amplify Their Wealth
• Vanguard: What are alternative investments?
• USA Today: https://www.usatoday.com/story/special/contributor-content/2023/08/04/why-gen-z-is-ditching-the-market-in-favor-of-alternative-investments/70532356007/
• Investopedia: https://www.investopedia.com/articles/trading/05/021605.asp

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