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The world of investments is quite big, but they can be categorized into two high-level groups: traditional investments and alternative investments. Traditional investments include standard investment vehicles such as stocks, bonds or cash equivalents. Alternative investments is where investment strategies gets interesting, and we’re here to tell you all about it.
There are many types of alternative investments and they all work in different ways. The popular ones include Peer-to-Peer Lending, Hedge Funds, Private Equity Funds, Real Estate and Commodities. Here’s a simple guide to alternative investments.
Peer-to-Peer Lending
Peer-to-peer lending is a new asset class that was traditionally only available to big banks and institutions. P2P lending allows everyday investors to lend out money to fellow peers who are seeking a loan. This generally works through a reputable online platform and is regulated by securities laws (like goPeer). The borrower benefits from a lower interest rate (APR) range compared to typical financial institutions and investors benefit from investing into an asset class that is not correlated with financial markets, and they also earn attractive returns as the loans get paid off. Investors may seek a peer-to-peer investing investment strategy to fully enable a true diversified portfolio, and platforms such as goPeer only require a minimum of $10 of investment per loan. Learn more about having a well-diversified portfolio and peer-to-peer investing here.
Hedge Funds
Hedge Funds are an investment pool contributed by a group of people. The word “hedge” means it may be protected against uncertainty due to their different investing styles. Hedge funds have to ability to take either Long (bet on) or Short (bet against) positions in an investment. Hedge funds are often unregulated, meaning they are not overseen by securities commissions or laws to protect investors. These investment funds are also difficult to get into due to the high management fees or a minimum investment requirement. According to a Forbes article, a typical initial hedge fund investment is anywhere between $500,000 and $1 million. Hedge funds are usually only open to accredited investors (i.e. a person with a special status under financial regulation laws). Hedge funds are also open-ended investments, meaning that investors may add more or pull out of the investment.
Private Equity Funds
Private Equity Funds are similar to Hedge Funds however they have a few key distinctions that make it an alternative investment strategy. Comparably to hedge funds, P.E. funds are also a contributed pool of investors however, its primarily function is to purchase a large stake (or sometimes a full acquisition) in a private company. By doing so, they gain controlling interest of the target company and then restructure it to turn a profit. As for the time horizon of the investments, P.E. Funds tend to be much longer due to the larger investments made in private companies. Investopedia claims a P.E. funds may hold the investment anywhere between 3 to 10 years. Again, the only type of people that are primarily allowed to access P.E. funds are accredited investors.
Real Estate
Real Estate Investments is something more commonly known. It is an investment strategy that considers purchasing a physical property, either commercial or residential and turning it into profit through cash flow income or capital gain of when the property is sold (and in most cases, it’s both!). When purchasing a real estate property, you may need to come up with a down payment, usually up to 20% (or sometimes more) of the property’s value. The remainder can be financed through a financial institution by obtaining a mortgage and paying interest on the loan. The great benefit about real estate investing is that if your property generates income through rent, it can help pay off the mortgage and build your equity within the property. Another great factor of real estate investing is that you can sell your property once it has gained enough appreciation in value. One of the key determinants of property appreciation is where it’s located. You may need to do extensive research of an area before placing money into a real estate property.
Commodities
Commodity investments can be volatile, and the commodities industry can be significantly affected by world events, import controls, worldwide competition, government regulations, and economic conditions, all of which can have an impact on commodity prices. The 3 common ways to invest in commodities are 1) buy them directly in their physical form, 2) buy shares in commodity companies or 3) buy indirectly through a fund or investment trust. Popular commodities include crude oil, coffee beans, natural gas, gold, silver, corn or many others. Commodities are typically driven by supply and demand. Investopedia claims that when stock market is volatile, investors typically scramble to transfer money into precious metals such as gold, which is historically been viewed as a reliable, dependable metal with conveyable value.
These are the main types of alternative investments. You may want to consider each asset class, including alternative investments, when building a well-diversified investment portfolio.