7 Best Alternative Investments to Consider in 2023

Alternative investments have gained significant attention and popularity in recent years as investors seek diversification and higher potential returns beyond traditional investment avenues. In this article, we delve into the world of alternative investments, comparing them to traditional investments and exploring the best options available. Additionally, we examine the thriving alternative asset management industry, which plays a crucial role in facilitating these unique investment opportunities. By understanding alternative investments and the landscape surrounding them, investors can make informed decisions to enhance their portfolios and potentially unlock new avenues for financial growth.

What are Alternative Investments?

Alternative investments encompass a wide range of investment opportunities that extend beyond traditional avenues like stocks, bonds, and cash. These investments typically involve assets that are not publicly traded on traditional exchanges. Alternative investments can include private equity, hedge funds, real estate, commodities, venture capital, infrastructure, collectibles, and more.

One key characteristic of alternative investments is their lower correlation with traditional markets. Unlike stocks and bonds, which often move in tandem with broader market trends, alternative investments can offer unique return drivers and diversification benefits. This lower correlation can help reduce portfolio volatility and potentially enhance risk-adjusted returns.

Furthermore, alternative investments often have different liquidity profiles compared to traditional investments. Some alternative investments, such as hedge funds or private equity, may have longer lock-up periods, restricting the ability to access capital quickly. Conversely, investments like commodities or exchange-traded funds (ETFs) provide relatively higher liquidity.

Alternative Investments vs. Traditional Investments

What are Key Differences between Alternative and Traditional Investments:

Factors Driving the Preference for Alternative Investments:

• Diversification: Alternative investments offer the potential to diversify investment portfolios beyond traditional asset classes. By adding alternative investments with a low correlation to traditional investments, investors can potentially reduce portfolio volatility and enhance risk-adjusted returns.

• Potential for Higher Returns: Alternative investments often target niche markets, unique strategies, or less-efficient asset classes, which can provide the potential for higher returns compared to traditional investments.

• Risk Management and Hedging: Alternative investments can act as a risk management tool by providing exposure to assets that may perform well during market downturns. Investments such as commodities or certain hedge fund strategies may serve as a hedge against inflation or provide downside protection.

• Access to Specialized Opportunities: Alternative investments offer access to specialized opportunities that may not be available through traditional investments. This includes investments in early-stage companies, venture capital, private equity, or unique real estate projects that can provide exposure to niche sectors or emerging trends.

7 Best Alternative Investments

Alternative investments have gained significant popularity in recent years, offering investors a diverse range of options beyond traditional investment avenues. Understanding each of these options is crucial before diving into alternative investments. Here, we break down the 7 best alternative investments available today. By exploring these options, investors can make informed decisions about which alternatives align with their investment goals.

1. Real Estate

Real estate stands out as one of the most widely recognized and highly favored alternative investments. The primary objective of most real estate investments is to generate a consistent cash flow that corresponds to the investment’s value.

Certain real estate investments prioritize growth by targeting dynamic and flourishing markets where property values are rapidly appreciating. In these cases, the focus is on purchasing and selling properties within these thriving markets. Investment managers, as well as individual investors, frequently employ funds to acquire, develop, and subsequently sell properties in these lucrative areas.

2. Infrastructure

Infrastructure investments are closely related to real estate investments, as they revolve around the ownership of specific real properties that generate value. For instance, an investor might possess assets like an oil rig, a section of an oil pipeline, a cell phone tower, and various other infrastructure elements.

3. Lending

Similar to real estate, debt investing is a highly popular form of alternative investment due to its ability to generate ongoing cash flow. When investors engage in debt investing, they anticipate the repayment of a loan, including interest, by the borrowing entity over time. Various forms of debt investing include:

• P2P Lending: This involves lending money directly to individuals through peer-to-peer platforms. However, investors should remain cautious about the possibility of defaults, as they can negatively impact long-term returns.

• Mortgage Debt: Investors can purchase mortgage notes that are in default or issue new loans to homeowners or fix-and-flip investors. This form of debt investing provides opportunities within the real estate sector.

• Additional Options: Investors have the flexibility to explore other debt investment avenues, such as purchasing invoice debt (unpaid payments owed to a company), traditional business loans, and more.

These diverse debt investment opportunities allow investors to diversify their portfolios and potentially earn returns based on interest payments and timely loan repayments.

4. Private Business

Investing in private businesses entails purchasing shares of companies that are not publicly traded. Although this type of investment carries risks, as some companies may fail before achieving a successful buy-out, there is also the potential for substantial returns. Many individuals who have successfully grown their own businesses opt to invest in other private enterprises, leveraging their expertise to serve as advisors and contribute to the growth of these businesses.

Private business investing encompasses various forms, including angel investing. Angel investors provide initial financial support to emerging companies, often during their early stages. Additionally, venture capital investments form another aspect of private business investing, involving subsequent investments in more established and mature businesses.

5. Precious Metals

Precious metals, like gold, silver, and platinum, hold the status of assets. They can exist in the form of coins with numismatic value or simple bullion bars for storage. Many investors find precious metals appealing as alternative investments due to their reputation as non-correlated assets (although this correlation can vary depending on the overall portfolio).

Usually, individuals who invest in precious metals prefer to directly own these assets instead of owning an ETF that tracks the metal’s value. This ownership provides them with the reassurance that their investment can be utilized during difficult times.

6. Commodities

Investing in commodities involves the buying and selling of assets through exchanges at predetermined prices. The most common commodities include agricultural crops like wheat or corn, energy resources, particularly oil, and precious metals as previously mentioned. Commodity investing can be intricate, especially due to the involvement of the futures market, which compares the future value of a commodity.

Interestingly, commodity investors are not necessarily owners of physical assets like warehouses filled with crops or oil rigs. Many investors engage in digital investing, ensuring the balance between supply and demand and profiting as intermediaries.

Investors have the option to purchase commodity funds through publicly-traded mutual funds and exchange-traded funds (ETFs). It’s important to note that commodity funds may exhibit short-term price volatility, but they generally serve as reliable safeguards against inflation in the long run.

7. Fine Art And Collectibles

Valuing fine art and other collectibles presents a challenge due to their unique nature as one-of-a-kind items. Fine art and collectibles have long been sought-after alternative investments, historically accessible primarily to the ultra-wealthy or fortunate few.

The Alternative Asset Management Industry

Alternative asset management involves the management of investment portfolios that primarily consist of non-traditional assets, such as private equity, hedge funds, real estate, and other alternative investments. Alternative asset managers specialize in navigating these unique investment options, conducting due diligence, and actively managing portfolios to optimize risk and return. Their goal is to provide diversification and potentially higher returns for clients compared to traditional asset classes. The alternative asset management industry plays a crucial role in facilitating alternative investments and providing investors with access to these unique opportunities.

Alternative investments encompass a wide range of investment opportunities.

Key Players and Their Strategies

The alternative asset management industry comprises various participants, including asset management firms, hedge funds, private equity firms, venture capital firms, and real estate investment firms. These entities specialize in managing alternative investment strategies and allocating capital to different asset classes.

Asset management firms often offer diversified investment portfolios that include alternative investments alongside traditional investments. Hedge funds employ various investment strategies to generate absolute returns and typically cater to sophisticated investors. Private equity firms focus on investing in private companies, often taking an active role in managing and growing their portfolio companies. Venture capital firms specialize in early-stage investments in high-growth potential startups. Real estate investment firms manage portfolios of real estate assets and investment properties.

Each player within the alternative asset management industry has its own investment approach, risk management strategies, and expertise within specific asset classes. Understanding their strategies and track records can help investors evaluate the credibility and alignment of interests with their investment goals.

Growth and Trends in the Industry

The alternative asset management industry has experienced significant growth over the years as investors seek diversification and higher potential returns. Factors contributing to this growth include increased awareness and education about alternative investments, evolving regulatory frameworks, and advancements in technology that have facilitated access to alternative investment opportunities.

A notable trend within the industry is the rise of environmental, social, and governance (ESG) considerations. Investors are increasingly incorporating ESG factors into their investment decisions, which has led to the emergence of sustainable and impact-focused alternative investments. Additionally, the industry has witnessed the development of innovative investment structures and platforms, such as crowdfunding and peer-to-peer lending, which have democratized access to certain alternative investment opportunities.

Regulatory Considerations and Challenges

Regulatory frameworks governing alternative investments vary across jurisdictions. It is important for investors to understand the regulatory landscape and comply with relevant regulations, including disclosure requirements, accreditation criteria, and restrictions on marketing and solicitation.

Challenges within the alternative asset management industry include managing liquidity risk, ensuring transparency and adequate disclosure, navigating complex investment structures, and maintaining robust risk management practices. Due diligence becomes crucial when evaluating alternative asset managers, as it involves assessing their investment processes, risk controls, compliance practices, and track records.

The industry also faces ongoing scrutiny regarding fees and alignment of interests between investors and asset managers. Understanding fee structures, such as management fees, performance fees, and carried interest, is important for investors to evaluate the potential costs and benefits of investing in alternative asset management funds.

By being aware of the industry landscape, key players, growth trends, and regulatory considerations, investors can make informed decisions when selecting alternative asset managers and navigating the dynamic world of alternative investments.