What Are Alternative Investments?
“Diversify! Diversify! Diversify!” is the mantra on every investment advisor’s lips and we could not agree more. However, diversification has varied connotations across different classes of investors. While, regular investors are happy to diversify through traditional equities, bond and mutual funds, the High Net Worth individuals and institutions want diversification with a tiara of exclusivity. This is where Alternative Investments find their place.
We all love options, don’t we? With the emergence of Alternative assets, the investment arena is brimming with options like never before. Diversification and higher returns define the essence of alternative investments. Thorough due diligence is essential prior to parking funds in an Alternative Investment.
Simply defined, Alternative investments are asset classes that vary from traditional investments on grounds of complexity, liquidity, regulatory mechanism and mode of fund management. But that is too theoretical isn’t it. Different types of alternative investments include Private Equity, Hedge Funds, Venture Capital, Real Estate, Commodities as well as Tangibles like Wine, Art, or Stamps.
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Alternative investments should be a significant component of your portfolio and are generally private (non-market traded) securities. These investments are established based on distinctive strategies that may not be available in traditional stocks, bonds or mutual funds. These investments can be equity or debt securities, and they can be complex or very simple.
Alternative investments are not at the periphery anymore – they have become more mainstream. With the introduction of recent regulations, private investments are now available to more than just institutional investors and high-net-worth individuals. Though our investments may not be suitable for everyone, they generally complement most portfolios. Selected properly, their diversifying benefits can protect downside risk and enhance returns, which is one reason why sophisticated investors have been using alternative investments for many years.
Alternative investments have the potential to display one or more of the following benefits. Not all securities will reflect these elements, and it is important to discuss risks with your representative to ensure an investment is right for you:
- LOW CORRELATION TO OTHER INVESTMENTS
- REDUCED VOLATILITY
- UNIQUE RISK-ADJUSTED RETURN PROFILES
- ACCESS TO NEW MARKETS SUCH AS PRIVATE EQUITY
- PRE IPO (Initial Public Offering) OR HIGH GROWTH OPPORTUNITIES
- UNIQUE INCOME SOURCES
- BENEFICIAL TAX TREATMENT