4 Common Types of Alternative Investments
Alternative investments are non -correlated assets that are not among the conventional investments such as stocks, bonds, and cash. It is estimated that since 2005 the global assets have grown twice as fast as the traditional investments according to McKinsey & Company, a global consulting company. A survey conducted in 2015 showed that advisers had 73% of their clients in alternative investments. The assets increase is caused by the Investors need to diversify their portfolio so as to include a wider range of assets. This helps to reduce volatility, generates better returns, hedges against inflation and to access steady and reliable sources of income. A study conducted by the Informa Investment Solution and published by Blackrock revealed that alternative investments didn’t fall as much as the traditional investment during the 2001-2008 recessions. Majority of financial advisers recommend investing not more than 25% of your portfolio to alternative investments. This is because a majority of the alternative investments tend to be illiquid. Here is a list of the major alternative investments to include in your portfolio:
1. Hedge funds
Hedge fund is a type of alternative investment where investors pool funds and use different strategies to earn returns. Hedge funds are managed to utilize derivatives and leverage to generate high returns. Hedge funds are classified according to their investment styles and their risks also differ among the different styles. Hedge funds are only accessible to accredited investors and require a large minimum investment but require less SEC regulation than mutual funds and other investment vehicles. Hedge fund requires an investor to keep their money in the fund for at least one year period otherwise known as lock-up period and thus is quite illiquid.
2. Real estate
Real estate is a tangible and immovable property that consists of land and buildings on it and other minerals and water. The benefits of investing in real estate include fairly stable and predictable income (rent), some form of tax benefit (depreciation or the tax deduction for mortgage interest), and some stability. The costs associated with real estate include maintenance, renting, taxes, insurance, and security. Another option of investing in real estate’s is to buy one or more publicly traded REITs where the REIT managers invest your money in various properties that they deem appropriate. REITs pay out 90 percent of the profits they earn every year in the form of a dividend which mostly range or can be more or less than 3.5 % to 5.5%. Another form of real estate investment is Commingled funds which are pools of money made up of contributions from a number of different pension plans or other funds. The commingled fund is managed by a professional money manager which can be a bank, insurance company, or an independent investment counselor.
Alternative Cryptocurrencies otherwise called altcoins are gradually gaining popularity. The first major decentralized cryptocurrency is bitcoin which was introduced in 2009. Bitcoin can be defined as a digital currency, a decentralized network through which bitcoins are transmitted and a chain block or blockchain, which is a decentralized accounting book where all transactions that occur are verified within the network permanently and anonymously. To be able to use bitcoin, the first thing you require is a wallet where you can store your bitcoins and with which you can transfer to other people. Financial advisers recommend not investing anything in bitcoin that you can afford to lose. Investing in bitcoin or any other currency has many risks such as another cryptographic currency could overcome bitcoin, a weakness in the encryption could be discovered, it could be affected if a failure is found in a particular algorithm, the bitcoin client can be updated to use different encryption algorithms, the governments could try to ban or regulate bitcoin and if there is an irreparable flaw could be discovered in the bitcoin protocol. There are other types of altcoins such as litecoin, Etherium, Zcash, Dash, Ripple and Monero. Investors should consider properly allocating Bitcoin, cryptocurrencies and blockchain based technologies as an alternative investment portfolio. In the near future, there will be more and more opportunities to invest in them as these investment opportunities open up.
Commodities are types of alternative investments and include raw materials that are sold in large quantities and other collectibles examples are oil, wheat, silver, gold, tea, fruits, flowers, fine wine and more. Most commodities are bought and sold with options and futures contracts. Speculators use passive and active investment strategies to invest in commodities.
Other types of alternative investments include music royalties, private equity, venture capital, managed futures, derivative contracts, private or direct investments, hard asset lending, distressed debt, liquid alternatives among others.
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