Alternative Assets: Benefits, Sources, and Methods

Growth capital

Growth capital, also known as expansion capital, is just that – funds for a relatively mature company to expand. Companies come to private equity investors for growth capital when they have already been in business for some time and now see an opportunity to go bigger or restructure for future benefits.

Buyouts

The strategy that PE investment is perhaps most associated with nowadays is leveraged buyout. When applying this strategy investors use mostly borrowed funds to acquire a company, restructure or otherwise raise its value and eventually sell it.

Hedge funds

Hedge funds are alternative investment funds that gather capital from private and institutional investors such as pension funds and mutual funds and invest it in diverse assets for high potential returns. Hedge fund managers employ various investment strategies and techniques, such as market-neutral and long-short equity to achieve the wanted results.

Real estate

Real estate investing, like investments in other types of real assets is considered an alternative investment since real assets have less liquidity than traditional. Three main types of real estate assets are residential, industrial, commercial properties. Investors can generate income by acquiring shares in real estate investment trusts, which invest in commercial properties.  

Private debt

This is the type of debt that is not bank loans or open market investments. With private debt, investors profit from repayments of initial loans plus interests.

Natural resources

Alternative investments into such natural resources as gold and other precious metals, oil, gas, and grown products have been around for centuries. Investors access various markets for natural resources through exchange-traded funds or a mutual fund.

Collectible items

Everything, from artwork and wine bottles to baseball cards and comic books, can become alternative investments if we can reasonably expect their value to rise.

Cryptocurrency

The newest major alternative asset class is cryptocurrency. Popular cryptocurrencies, first and foremost Bitcoin promise great returns but are also extremely risky due to their novelty and lack of data regarding their long-term effect on the markets.

Traditional investment vs. alternative investment

Liquidity

Traditional assets are usually more liquid as it is easy to trade in cash or cash equivalents. Alternative assets are highly illiquid as there are less interested and capable buyers for unique collectible items or property.

Types of owners

Alternative asset owners are often active, like property owners who are involved in caring for and renting their property. Usually, alternative investments are made by institutional investors, mutual funds, and accredited investors such as high-net-worth individuals, as they often require high minimum investments. However, some alternative assets are becoming increasingly available to smaller individual and retail investors.

Regulation

While traditional investments are highly regulated by various national and international organizations, due to their diverse nature, alternative investments have less unified and overarching modes of regulation.

Sensitivity to market conditions

Traditional assets are strongly correlated with each other as all of them are the main liquid tradable assets in the market, making their value highly dependent on the general market conditions. Many alternative investments have no such dependency and can go in a different direction than the general market.

Usage of leverage

Traditional investors generally do not use leverage, that is, borrowed capital for investment. Alternative investors use it for some strategies, like the aforementioned leveraged buyouts.

Risk and rewards

Alternative investments bear more risk, as it’s harder to predict the value trends of assets that are less dependent on foreseeable market changes. However, this also means higher potential returns on investment.

Advantages of utilizing public web data for investment

Variety of information

Even traditional institutional and accredited investors utilize public web data to boost their investment decisions. But having understood the basics of alternative investments it’s not hard to see that public web data is especially necessary here. Public web data is even more diverse than alternative assets, thus it can provide valuable information for all asset classes. From public sentiment data to firmographics, all types of public web data can help to determine the value of private companies or items that alternative investors might want to trade.

Efficient-decision making

Managers of a financial institution often need to act fast not to miss out on the best investment opportunities. Public webdata sources, like social networks, satellites, and smart devices transmit information immediately. Meanwhile, waiting for industry releases may take a while. Thus, to make decisions efficiently, investors get their news from alternative sources. Additionally, hedge fund managers find such public web data types like website traffic information extremely important when evaluating a company that is trying to attract investments.

Machine learning

As many as 63% of financial firms that use machine learning, do it for trading and investment idea generation but are held back by insufficient data. On the one hand, it shows the importance of AI-related service providers in contemporary investment. On the other hand, it makes it clear just how crucial varied and high-quality data types are in order to properly utilize machine learning. Training algorithms for better investment models could be very helpful in mitigating the inherent risks of alternative investment. And such training would need to rely on the great volume and diversity of public web data to increase the predicting power of AI-based tools.

Rare insights

As public web data ranges far beyond traditional financial asset data, it can provide insights that are simply not possible when using just traditional sources. These are the kind of rare insights that most investors dealing with alternative assets look for. Satellite imagery might show activity in the mines where there are precious metals from around the globe, thus helping to determine the volume of supply and thus market worth of these metals. While social media presence of contemporary artists might have an impact on their public image that translates into acceptance of their art for the following decades. Such examples of insights provided by public web data are valuable although relatively easy to think of, while the ones hidden deeper in the data are even more rewarding.

To further emphasize the advantages of public web data for investors, here is an infographic that shows several public web data use cases in terms of investing.

The importance of data when dealing with alternative assets

As alternative investment is less regulated and consists of various types of assets and modes of conduct, there is much less transparency in private markets than with traditional forms of investment. When dealing with high-value investments and having only a limited understanding of the relevant facts and procedures involved, alternative investors risk making crucial errors. Additionally, insurance companies and individual investors always risk falling victim to fraud.

And when fraud is suspected after the deal, it may take up a lot of time and resources to untangle it, hence the old saying “buyer beware”. Dmitry Rybolovlev, a high-net-worth individual investing in artwork, can testify to that. It was back in 2015 when lawsuits were filed, accusing an art dealer of swindling $1bn dollars from Rybolovlev and the case is still ongoing in 2021.

The only way to mitigate such risks is, of course, by increasing and diversifying sources of relevant information. Traditionally used data sources will tell little about the trustworthiness of a broker or a service provider, or anonymous sellers’ true asking price, and even less about alternative assets that fall further below the radar than artwork.

However, even pieces of seemingly unrelated information openly shared on social media or publicly available historical records may enable investors to piece together the true picture of the conditions they deal with. Because of this capacity to reveal suspicious activity and conquer misinformation, public web data is one of the top ways to enhance alternative assets.

Wrapping up

When doing things in an alternative way, one can no longer rely only on traditional tools. Thus, investors find their path through the broad and dense jungle of alternative investment, by getting directions from public web data sources. Whatever the asset is, there are always public web data types relevant for trading it.