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Alternative investments: Definitions, types and FAQ Whether you're a beginner or a pro, these assets can offer a chance for diversification
We'll break down the benefits, risks and how to add some of these resources to your portfolio.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
When you think about investing in different asset classes, chances are stocks and bonds come to mind first. That’s because these traditional assets make up the bulk of many investors’ portfolios. But in a turbulent market, it’s common to see them decline in value or deliver minimal returns.
Many investors are looking to diversify their portfolios by adding alternative investments that fall outside traditional asset classes. Alternative investments include things like private equity, hedge funds, real estate, art, wine, and more. These investments generally aren’t available on public exchanges.
Alternative assets can provide some balance during tough economic times, as they typically have a low correlation with the stock and bond markets.
More: What are alternative investments?
Traditional investments vs alternative investments
Alternative investments not only offer diversification, but they may provide higher returns than traditional investments. Of course, your returns will vary depending on your investment choices, market conditions, and other factors.
Here’s a look at how certain traditional investments performed relative to some alternative investments over a five-year time period, from 2017 to 2022. This data is provided by Brent Weiss, co-founder of Facet Wealth, and Bloomberg Terminal. It includes returns on investments held from Dec. 31, 2017 to Dec. 30, 2022.
Investment type
Average annual return
S&P 500 (stock market index)
9.42%
U.S. Treasury Bonds
-0.10%
Real Estate
3.74%
Gold
8.63%
Commodities (wheat, nickel, crude oil)
6.4%
Hedge Funds
2.83%
Crypto
-10.48%
How to buy alternative investments
Unlike stocks, which are traded on a public exchange, alternative investments aren’t necessarily publicly-traded. If you’re interested in these assets, you may need to purchase them through a private firm or money manager.
That said, alternative investment funds may be offered through online brokerages or other platforms. For instance, you could purchase shares of a gold exchange-traded fund (ETF) or alternative mutual fund through a broker. You could also buy cryptocurrency online through a crypto exchange.
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Types of alternative investments
Definitions vary slightly when it comes to what is considered a true alternative investment, but here are some popular, agreed-upon alternative investments you can consider.
- Hedge funds - private funds consisting of money from a group of private investors, or limited partners.These funds may rely on leveraged trading — or investing borrowed money — to try and generate large returns. Their reliance on leverage makes them a fairly high risk investment choice.
- Equity crowdfunding - A unique type of fundraising that lets businesses raise capital without taking out loans. With this model, a large number of investors contribute to a business through an equity crowdfunding platform like AngelList or Fundable. In exchange for their contributions, investors receive a stake in that business.
- Private debt - Purchasing debts held by private companies, most often through private debt funds. These funds, such as peer-to-peer lending, may specialize in certain types of financing, such as direct lending, real estate or infrastructure.
- Commodities - Basic goods, natural materials, or agricultural products, such as coffee beans, sugar, wheat, gasoline, crude oil, copper, gold and other precious metals. You can invest in commodities through futures contracts - speculative investments that allow you to buy an asset for a set price and sell it for a certain amount on a specific date.
- Real estate - Traditionally, investing in real estate meant purchasing residential or commercial properties and renting them out for income. But thanks to new online platforms, real estate investors now have more options. Real estate investments can take the form of: rental properties, farmland, and REITs.
- Collectables - Whether you’re interested in artwork, wine or stamps, investing in collectibles can provide diversification and potentially higher returns than certain traditional investments. Depending on what you’d like to invest in, you could purchase collectibles through an auction or online platform specializing in your desired asset.
- Cryptocurrency - A digital asset that trades on cryptocurrency exchanges. While crypto had a rough year in 2022, Bitcoin has still generated some impressive returns over time. In the past five years, this popular cryptocurrency has increased in value by 3%. And unlike gold coins or bullion, you can store Bitcoin in a digital wallet, so you won’t need to find a place to put it.
Test your alternative investment knowledge
What percentage of art collectors buy pieces with the intention of quickly selling them for profit?
Alternative investments FAQ
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