The Ins and Outs of Alternative Investments

Alternative investments have come to the forefront as a means of protecting capital from an economic downturn. However, alternative investments are not new and have been used by investors as a means of protecting and diversifying their portfolios while mitigating risk.

Defining Alternative Investments

Alternative investments are assets that fall outside of conventional investments. While most people invest in stocks and bonds, alternative investments include private equity, derivative contacts, antiques, art, and certain forms of real estate. An economic downturn does not impact the value of alternative investments compared to conventional ones, which can experience highs and lows regularly that can affect the value of your portfolio.

What Makes Alternative Investments Attractive?

First, alternative assets typically cost less than conventional investment assets because there are lower turnover rates. Investing in real estate or art may have a high initial investment, but those assets are usually held to appreciate. By placing money in alternative investments, you can diversify your portfolio by purchasing something that is considered valuable and sought after but is not influenced by the performance of the stock market in any way.

Liquidity and Risks

While there is always a market for real estate, commodities (such as oil and gold), or works of art, the network of buyers is a niche, and therefore small. Investing in art or rare books is a great way to diversify and protect your capital, but the market will be limited when trying to unlock capital later. Additionally, because alternative investments are very finite (there is only one original painting from a given artist, a limited number of first edition books, Tiffany lamps are numbered, etc.), it can be challenging to get a consistent valuation.Additionally, regulations on alternative assets are often left to third parties that specialize in very specific areas of knowledge. While this can go a long way toward establishing provenance and rarity, it can also open the door to frauds and forgeries. If you are dealing in alternative assets, be sure to work with professionals who have the depth of knowledge you need to get an accurate appraisal. Due diligence will always favor investors.

Alternative Investment Strategy

Alternative investments can provide a high return. For example, fine art is a nearly $2 trillion asset class that has outperformed the S&P 500 over the past quarter of a century. Real Estate and hedge funds are also alternative investments that protect against inflation. Real estate has a very tangible use and can yield a high return, whether it is eventually sold or repurposed for private or public use. For these reasons, many institutional investors will set aside at least 10% of their portfolios for alternative investments.If you are considering alternative investments as a means of diversifying your portfolio, protecting capital against inflation or economic downturns, and getting a high ROI, contact the specialists at Evolt Capital.