Lack Of Regulation And Fraud
Perhaps the greatest danger of any alternative investment is the lack of regulation. Many investors believe a lack of code to be a good thing, as they feel that overregulated markets are limited in growth. However, with many alternative investments, this can be a real danger.
A lack of regulation can take many forms, including a lack of transparency, unlicensed and unscrupulous vendors, and outright inaccurate or fraudulent information being exchanged. It can result in investors making poor decisions or losing their money to thieves.
Since alternative investments are usually new, governmental units find it difficult to regulate these markets appropriately and investigate potential threats. As a result, consumers must be extra cautious when investing in an alternative investment plan.
Local & Small Businesses
When people think about investing in businesses, most people only think about publicly traded companies. Or they think about how their neighbors brothers friends roommate wants to open up a brew pub and is looking for investors. Those are typically risky operations because you have to invest a lot into a single entity.
What if you can support small businesses while making small investments in a variety of businesses? Thats where a platform like Mainvest comes into the picture you can invest in small businesses with as little as $100 and target returns from 10-25%.
When you make an investment, you participate in a revenue sharing agreement with the business. To qualify for the platform, businesses have to raise at least $10,000 from 10 people they know personally. This has helped lead to a 97% repayment rate pretty stellar.
Real Estate Development And Resale
Colloquially known as “flipping,” buying and improving properties and then reselling them can be more profitable than simply collecting rent. Real estate that is flipped is often purchased at a significant discount, usually because it needs substantial improvements or repairs.
Real estate flipping is also one of the riskier ways to invest in real estate since your ability to generate profit requires specialized skills and experience. Real estate flippers can confidently value a property, accurately estimate the costs to improve it, and then quickly complete those improvements to make the home available for sale again. However, buying, improving, and reselling property is time-consuming, requires significant capital, and can be stress-inducing.
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Accredited Investor Vs Eligible Investor For Alternative Investments
Before we dive into the select group of people who are allowed to invest in alternative assets , it’s essential to understand that not every alternative investment requires you to follow specific requirements before you are allowed to buy them.
For example, if you are buying cryptocurrency, holding on to it, and selling it for a profit, this would fall under the umbrella of alternative investment. Still, you don’t have to be an accredited or eligible investor for it.
So who are these accredited and eligible investors anyway?
According to the Ontario Securities Commission Prospectus exemption , an Accredited Investor is someone that:
- Is registered as an advisor or a dealer under Securities act, or
- Has a net worth of $5 million , or
- Has net financial assets worth at least $1 million. That doesnt include primary residence, or
- Net income of more than $200,000 a year .
There might be some other stipulations as well, depending upon the particular alternative investment you are going for, but even that should give you an idea that its an exclusive club. These investors are expected to have enough assets and liquidity to absorb the financial fallout of a risky alternative investment.
That poses a two-way problem. Not many people can invest in alternative assets and entities that are offering these assets have a very limited pool to reach out to. In order to widen that pool, another class of investors was introduced, called eligible investors.
Why Choose Alternative Investments
Investors seek out alternatives to stocks, bonds and cash for a lot of reasons. Some may find the stock market confusing while others just prefer more hands-on options where they can buy and sell real, tangible assets or inject funding into a new business idea they want to see grow. Still others choose to do both. They maintain a portfolio of stocks and bonds but add alternative investments as a way to further diversify their portfolio.
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Why Stray From Traditional Investing
Traditional investing is less risky than the alternative, which is why investors should not abandon it entirely. With that said, complementing traditional investments with alternative investments is a great way to diversify investments even more. Ultimately, expansive diversification mitigates risk and fortifies your portfolio in the midst of volatility.
The options are narrow in scope for traditional investments. If you have a particular interest or knowledge about the following categories, that may be even more reason to extend your investments.
Alternative investments have little correlation with the stock market, but the value can be difficult to ascertain and investments offer less liquidity than do traditional investments.
Typically, only accredited investors can invest in alternative investment platforms, but that may be changing as new platforms open up alleyways to invest in this asset class.
Types Of Alternative Investment
Just to list a few forms of alternative investments: Real estate , tax lien certificates, commodities, farmland, cryptocurrency, merchant cash advance, timberland, mineral rights, intellectual property, privately underwritten mortgages, structured settlements, art, wine, coins, venture capital, peer-to-peer lending, hedge funds, and annuities.
There is an overwhelming number of avenues in which your money can go down. These are the most prominent forms of alternative investing:
Hedge funds are formed by investments pooled together and managers utilize various strategies to grow the account and boost return. Some of the strategies include arbitrage and equity long-short.
Hedge funds invest in anything from real estate and currencies to merchant cash advance contracts and derivatives. These accounts are less regulated than mutual funds and are a fairly expensive investment. In the past 20 years though, the return has been significantly increasing.
If you are an art connoisseur or have a growing collection, this alternative investment may be fitting. The uniqueness of each piece dictates the value and therefore price. Costs can be extremely high and illiquid, but the aging factor pays off.
Exclusivity leads to higher prices, but to higher return also. The fame of the artist is also an important factor. There are platforms and resources out there that can help you make an informed investment choice and one that does not cost an arm and a leg either.
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Wine Real Estate Art And Cryptocurrency Can Outperform Inflation And The Market But Come With Risks And Volatility
While alternative investments posted strong returns as inflation took off in 2021, their performance over the past five years is ripe with volatility.
Among alternative investments, cryptocurrency exhibited by far the most volatility on the basis of yearly returns.
Since 2017, wine has been the least volatile alternative investment, followed by whiskey, gold, REITs, commodities, and art.
The S& P 500, while slightly more volatile than wine, whiskey, and gold, has also posted a stronger average annual return over the past five years than three alternative investments as well as REITs.
Data sources: Bureau of Labor Statistics, NASDAQ, Bloomberg Barclays U.S. Aggregate Bond Index, Live-ex, Rare Whiskey 101, Art Market Research, S& P Cryptocurrency Broad Digital Market Index, CoinDesk, S& P GSCI. Bitcoin data from 2014 begins on November 4. Inflation data from 2021 is the year-to-date change from December 2020 to December 2021.
Alternative investments also come with unique risks.
Stocks are strictly regulated by government agencies and the exchanges they list on, while the markets for wine, whiskey, art, and cryptocurrency operate with relatively little regulation and can lack transparency.
Alternative assets that are physical are by definition illiquid, which can create a headache if funds from such an investment are needed but can’t quickly be accessed.
Other Real Estate Options For Non
- HomeUnionprovides turnkey rental property search and acquisition services in several markets.
- Doorvest will help you buy and manage out-of-state rental property. The fees are higher here, but they guarantee the rent gets paid.
- YieldStreet A $1000 minimum can get you into YieldStreets Prism fund that includes not just real estate, but also art, financial contracts, and more.
Real Estate Options For Accredited Investors
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Are Alternative Investments Worth It
Most alternative investment assets are the ones that are held by institutional investors or even by high net worth individuals because of their complex nature. Theres also a high barrier to entry because most alternative investments require a high minimum investment and a high fee structure.
They seem to be exceptionally high compared to stock investments or compared to exchange-traded funds. Most alternative investments have less opportunity to publish their verifiable performance data and advertise to their potential investors.
The majority of investors will find it harder to sell a 90-year-old painting but selling a thousand shares of any stock would be much easier and something that could be done in hours.
Alternative investments are also highly prone to scams and investment fraud due to their unregulated nature. It is also harder to evaluate a price for an alternative investment, which is why only knowledgeable individuals engage in such investments.
Disadvantages Of Alternative Investments
Alternative investments are often more complicated than traditional investments, and you need expert knowledge of the asset class to derive meaningful benefits.
Consider hedge funds and real estate. Both these investments require you to have an advanced understanding of how the assets work before you consider purchasing anything.
Alternative investments have a higher fee for the transaction than regular investments. These investments also do not have the same level of liquidity that you get with stocks or bonds. Once you have committed the funds, you are often required to keep the investment for a period of two to five years to get a good return.
As with any other investment, the higher rate of possible return on alternative investments means there is a higher risk of loss as well.
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Top 6 Alternative Investments Based On Your Investing Strategy
Everyones portfolio is inherently unique: Your needs might be determined by the length of your investing period, how much risk youre willing to take on, and how you size up the best opportunities for your goals. No matter what your objective is, theres guaranteed to be an alternative investment, based on your investing strategy that can be the perfect complement to the rest of your portfolio.
The world of alternatives is huge, if not maybe even a little overwhelming for the first-time investor. The variety of options can actually help you, however. As long as you have a clear sense of what you want from your portfolio, you can determine what the best alternative investments are for your investing strategy.
Weve broken down what some of the top 6 alternative investments are based on common investing strategies. Heres what you need to know as youre getting started.
Who Should Invest In An Alternative Investment Platform
Experienced investors with the majority of their capital invested in traditional investments are most appropriate for alternative investmenting for their remaining capital. In general, alternative investment ideas are suggested for surplus funds available after you have created a portfolio that will meet your financial goals. Only after designing a traditional portfolio, which likely includes cash for emergencies, should you consider alternative investments such as cryptocurrency.
Reasons to try alternative investments:
- To diversify beyond stocks and bonds
- To speculate, seeking high-risk, high-reward returns
- To reduce overall portfolio losses by reducing correlation with the stock market
- To gain exposure to markets unreachable by traditional investments
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Do You Need Alternative Investments
The key to investing is diversification.
You dont want to be overexposed in any one area.
Its why experts recommend you get an appropriate mix of stocks and bonds. Its also why you need a good mix of domestic and international, so the woes of any one nation dont sink your fortunes. Its also why experts recommend some part of your portfolio to be in alternative investments.
In theory, alternatives arent supposed to be strongly correlated with the stock market or many external forces. They may be negatively correlated, as often is the case with gold and the stock market.
Alternative investments are often used as a hedge against the rest of your portfolio.
Gold Silver And Other Commodities
Precious metals like gold are usually bought in times of extreme financial system stress or when high inflation is expected. So, they tend to correlate less with other financial assets. Currently, gold is over $2,000 an ounce! This is being driven by stimulative monetary policy around the world.
Other commodities, like copper, aluminum, or grains tend to track along with economic activity. Since these investments dont really distribute any cash, theyre often considered riskier investments however, most portfolio managers advise having some exposure to commodities.
You can buy physical commodities or you can invest in financial ETFs that track the physical price. GLD is a gold ETF. ETFs for metals and commodities can be bought through any online brokerage account.
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Forget Gold Battery Metals Are The Real Precious Investment
A precious metal portfolio may sound appealing, but is it your best bet when it comes to money-making minerals? While metals from platinum to palladium and the more classic metallic investments of silver and gold have a good risk-to-reward ratio, 2022 is seeing a huge increase in demand for battery metals including nickel, cobalt, and lithium.
The rapid rise in sales of electric vehicles, explains Henry Sanderson, Executive Editor at Benchmark Mineral Intelligence, has created a boom for producers of battery metals most of whom saw huge increases in profits last year. Sales of EVs rose to 6.6 million last year, more than double the previous year, and that was driven by rapid growth in China. As a result, Chinese battery metal producers are saying they are likely to report record results last year.
Its true. Tesla lithium supplier Ganfeng Lithium reported that its profits last year landed somewhere between ¥4.8 billion to ¥5.5 billion , which is a year-on-year increase of between 368% and 437%. No wonder lithium has been dubbed white oil by those trading on its popularity.
But investing in lithium is a little trickier than investing in classic cars or casks of rum. As there isnt a futures market with individual investor access, and lithium isnt traded on any stock market exchange, budding investors will have to put their money directly into lithium producers stocks, or through exchange-traded funds.
Who Are Alternative Investments Right For
In the past, alternative investments were only right for individuals with a high net worth or income. Historically, they were the only ones who could be accredited investors. But today, alternative investments can be right for a wider group of investors. Progressive legislation like the Fair Investment Opportunities for Professional Experts Act has expanded the criteria for accredited investors beyond just income and net worth. The SEC opened the gates to people based on financial knowledge and experience. Not only does this allow certain experts to become accredited investors, but it also protects those who arent from financial loss.
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A Deep Dive Into Private Markets
Private markets are becoming increasingly popular as investors shift parts of their portfolios away from publicly traded assets in order to diversify their risk and return drivers. The opportunities in private markets span many sectors and regions, each offering something different to investors. Yet they all share the qualities of being shielded from much public market volatility and having the potential to earn a premium by being held over the long term.
However, accessing managers that invest in private markets can be challenging for some investors this is where Mercer can help. We have been investing in these markets for more than 25 years, establishing deep relationships with a wide universe of highly-rated managers. Our dedicated alternatives group of over 180 professionals across 20 global locations, work on $200bn of alternatives advisory mandates for clients – $21bn of assets being under direct implementation.3
Advantages Of Alternative Investments
Alternative investments have several advantages that make them attractive options for investors. In most cases, the value of alternative investments is not affected by the market.
Even if the values of the stocks are falling in the market, the alternative investment values remain stable or go up. This helps counterbalance market volatility and sudden crashes.
Alternative investments can also offer several tax benefits that are otherwise unavailable with regular investments. For example, the government often subsidizes agricultural businesses or charges tax at zero-rate to boost production to keep food prices down.
The rate of return for alternative investments is not guaranteed and it can go up or down due to market factors. However, data suggests that alternative investments always perform better than regular assets during a downturn or recession.
There have been a lot of developments in alternative investments in the last couple of decades. Supporters of alternative investments argue that they now have access to sophisticated investments and offer higher returns to individuals today than was only possible for institutional investors ten years ago.
- Possibility of tax-exempt cash flows
- Greater control on assets
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How Can Alternative Investments Be Useful To Investors
Some investors seek out alternative investments because they have a low correlation with the stock and bond markets, meaning that they maintain their values in a market downturn. Also, hard assets such as gold, oil, and real property are effective hedges against inflation. For these reasons, many large institutions such as pension funds and family offices seek to diversify some of their holdings in alternative investment vehicles.