What Are Alternative Investments?
Bonds and stocks are not the only investment option. Education in savings, investments and consumption is increasingly inclusive and new technologies are incorporated into the sector to make deals between investors easier and more direct.
Despite this openness, there are still unknown areas that inhibit potential investors, for example, that of alternative investments.
When talking about alternative investments, it refers to all those investments in non-traditional assets or in traditional assets through non-common methods.
In the first case, for example, it might be investing in sectors such as infrastructure, commodities or micro-real estate investments, while the second case might refer to methods such as short sales or leverage.
Alternative investments are not new
The first alternative investment fund was created in 1981 by BlackRock. It managed to raise more than 135,000 million dollars in assets. Currently, alternative assets make up an industry of 7.7 trillion dollars and this amount is expected to double by 2021.
Among the alternative investments are hedge funds, which differ from traditional funds by having fewer management limitations, a wide variety of assets, the use of leverage and derivatives.
Another alternative investment is private capital, where companies are selected, and an attempt is made to increase their value by improving the company’s operations, government and finances. The profits are obtained through the sale of interest, the flotation of shares through a public offering or through a merger with another company.
Real estate also qualifies as an alternative investment, since it provides income, protects capital from inflationary effects, and offer a high degree of diversification. For example, strategic asset management experts Maritime Capital identify opportunities available in the retail sector, business services and hospitality, and urban renewal projects for those not attracted to conventional residential or office building real estate investments.
High level of diversification
There are multiple advantages of leaning towards acquiring alternative investments, for example, it is a way to potentiate the risk-return characteristics due to the low correlation with the stock market and public bonds, they generate returns due to the high dispersion of the alpha of each investment and they have a lower degree of volatility.
However, they also have disadvantages, such as greater illiquidity, long periods of investment and transferability limitations.
Depending on the investor’s profile, the appeal of investing or not in these instruments might vary greatly; for example, a passive investor with greater risk aversion will probably prefer to invest in more conventional bonds or shares.
However, those investors looking for a more dynamic investment instrument will find there are ample opportunities in, for example, gold-based ETFs, and lithium and nickel mining companies (think electric cars), as well as green technology companies, and others, which potentially offer lucrative returns over the long term, as they address future technology, infrastructure and energy needs.