What You Should Know About Alternative Investments
Investing is a great way to keep the value of your money. Otherwise, you will lose value if you store your money in a bank account and do nothing with it. This happens due to inflation. Additionally, money that sits around in your bank account is, to some extent, wasted. If you have money to spare, investing can not only retain the value of the money but potentially bring you big profits. When it comes to investing, you are probably well informed about stocks and bonds. These are more traditional means of investing. Compared to them, there are a lot of alternative investments you can choose from. Alternative investments consist of many different options that you can choose from. They include hedge funds, private equity, antiques and art, managed futures, and venture capital.
What Are Alternative Investments?
As we mentioned, alternative investments are financial assets that are different from traditional investments like stocks and bonds. They include hedge funds, private equity, antiques and art, managed futures, and venture capital. Also, commodities and real estate can be included as alternative investments. However, not everyone can own alternative investments. When it comes to them, most alternative investments are in the hands of high-net-worth individuals or institutional investors. The reason is that alternative investments are complex, carry a certain degree of risk, and lack regulation. In addition, compared to exchange-traded and mutual funds, alternative investments have substantial minimum investment and high fee structures.
Additionally, alternative investments do not have many opportunities to publish verifiable performance data. Because of that, advertising to potential investors is quite difficult. Furthermore, alternative investments might have high minimum investments and fees, but transaction fees are significantly lower.
When it comes to liquidity, it is safe to say that alternative assets are less liquid when placed against conventional assets. We can all agree that selling an antique chair is much harder than selling shares of a popular company. The reason behind this is simple; there is a clear difference in demand. There will be more buyers interested in shares rather than an antique chair. Additionally, assessing the value of that chair can also prove troublesome. An investor might have a hard time putting a price on the item if it is extremely rare.
How Are They Regulated?
Compared to the more traditional investments, alternative investments are not as regulated. It is safe to say that they might even lack regulation. When you have items that are hard to evaluate correctly, it is bound that scams and fraud will be present. For example, in the U.S., even though they are not regulated enough, alternative investments do fall under the domain of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Furthermore, the whole operation is under the examination of the U.S. Securities Exchange Commission, or SEC for short.
Because of the risks, investors that are considering alternative investments should always stay informed and vigilant. Additionally, in some situations, in order to invest in alternative assets, you would have to be an accredited investor. So, who are accredited investors? Well, in order to be considered an accredited investor, you would have to have a net worth of at least $1 million. This does not include your primary residence. Another option is that you have an annual income of $200,000 by yourself, or if you are married, combined with your spouse, you should have at least $300,000. Lastly, if you have a FINRA Series 7, 63, or 82 license, you are considered a financial professional and therefore qualify to be an accredited investor.
Advantages and Risks of Alternative Investments
There are several advantages as well as risks that come with alternative investments. First, let’s cover some of the advantages. The greatest advantage that alternative investments have is that they have a low correlation. What this means is that, for example, commodities can do well even if the stock market is experiencing pressure. The second advantage is that alternative investments are extremely diverse because of their low correlation to the stock market. This way, you can make your portfolio more diverse by adding alternative investments. The last advantage we will talk about is that alternative investments are not as volatile.
When it comes to risks, there are quite a few. Firstly, as we already talked about, alternative investments lack the necessary regulations. Secondly, with the lack of regulation comes the lack of transparency. Because of that, there is not enough information for investors. Thirdly, the valuation of certain alternative assets can vary quite a bit. Therefore, it is hard to put a concrete price on some alternative assets. Finally, alternative investments are not for every investor out there because of their high minimum investments.
With all the advantages and risks that come with alternative investments, the best thing you can do is to stay informed. If you inform yourself, you will reduce the risk of being tricked and scammed.