Want to make your money work harder for you? Investing your capital is one of the smartest ways to generate passive income – and investors everywhere are on the hunt for alternative investment opportunities that offer real profit potential without the unpredictability of traditional markets.
The good news? A growing number of alternative investment platforms are making that search easier than ever. The catch? Not every opportunity is what it seems. Some of the best alternative investment ideas are gated behind accredited investor requirements, while others are simply too good to be true.
In this article, we'll break down popular alternative investment assets – from private equity and hedge funds to real estate – and show you the red flags to watch for so you can invest with confidence instead of falling for speculation.
What is an alternative investment?
An alternative investment is any asset that falls outside traditional categories like stocks, bonds, and cash. These assets are typically harder to sell quickly, less regulated by the Securities and Exchange Commission (SEC), and often limited to accredited or institutional investors due to high fees and minimums.
Because alternative assets are so diverse, they can be difficult to categorize. However, some key similarities allow grouping all such assets into one broad category of alternative investments:
- They are harder to sell or otherwise convert into cash than traditional assets.
- Alternative investments are not subject to the same regulatory requirements by the US Securities and Exchange Commission (SEC) as traditional assets, leaving more room for speculative investment practices.
- Alternative assets have a low correlation to the stock market and other conventional investments, meaning they do not necessarily react to changing market conditions the way conventional securities do.
- Due to high fees and minimums, alternative investments are usually accessible only to institutional investors, like pension funds and mutual funds, accredited investors, and high-net-worth individuals.
While these key aspects are common among alternative assets, they do not capture the full picture of how diverse alternative investments are. Below, you can find each major category described in more detail.
Advantages and disadvantages of alternative investment assets
Every investment field has benefits that attract some investors and drawbacks that push others to put their money elsewhere. The same goes for alternative investments. Here is a table of the pros and cons of investing in alternative assets to help you decide if this is for you.
Different alternative investment types
Alternative investments come in many forms, each with its own risk profile, liquidity constraints, and path to generating returns. This section breaks down the major types, from private credit and real estate to structured products, to give you alternative investment ideas.
Private equity
This broad category of alternative investment includes different investment vehicles such as venture capital firms and private equity funds. Private equity refers to capital investments in private companies whose shares are not traded on public markets.
Private equity funds are similar to hedge funds and mutual funds in that they pool together capital from various private equity firms and accredited investors to invest in private companies.
Private equity funds are usually managed by one firm – the financial advisor who uses the money on behalf of the fund. Unlike mutual funds and hedge funds, private equity funds seek long-term alternative investment opportunities.
Private equity includes both growth and venture capital. While venture capital focuses on early-stage startups, growth capital focuses on more mature private companies. Unlike investing in publicly traded stock, private equity investors usually provide additional guidance and expertise to their portfolio companies.
Private equity firms earn a return on their alternative investments either by selling their stake in the firms or when they become public companies through an initial public offering (IPO).
Hedge funds
Hedge funds are pooled investment funds that employ complex tax structures and trading techniques. Hedge fund managers turn to short-selling, derivatives, and leverage to boost the fund’s performance.
Unlike venture capital firms, hedge funds tend to invest in highly liquid assets like public equity to get the highest possible return of all alternative investment types in the shortest period of time. Hedge funds are exclusive to institutional investors, like endowments and mutual funds, and high-net-worth individual investors with relatively high risk tolerance.
Alternative mutual funds
Alternative mutual funds, also called alt funds or liquid alts, are regular mutual funds that use hedge-fund-style strategies, like short selling, leverage, and derivatives, while still following standard mutual fund rules.
This makes them different from most alternative investments. Since they are registered like traditional mutual funds, they offer daily liquidity, clear disclosures, and lower minimums, giving everyday investors access to strategies once reserved for wealthy or institutional investors. For people exploring alternative investment opportunities without wanting to commit to illiquid, high-minimum vehicles, this structure can be an appealing middle ground.
Alternative mutual funds aim to make money in ways that do not depend on the market going up, such as betting against stocks, market-neutral trading, or merger arbitrage. That is why investors often use them to diversify a portfolio and cushion against downturns, rather than to chase high growth.
However, there is one thing you should keep in mind about alt funds: because the strategies are complex, fees are usually higher than typical mutual funds, and returns can vary widely between funds.
Private credit
Private credit or private debt refers to loans made by entities other than banks. These entities can be private debt funds specializing in such lending or other companies and accredited investors that can provide the loan.
The “private” part refers to the lender not being a bank rather than the borrower. Thus, both private and public companies can benefit from such lending. Lenders generate ROI through interest payments that they receive.
Real estate
Of all types of alternative investments, real estate is perhaps the most accessible to the broader public. Even those who do not typically invest may have alternative assets in the form of private real estate.
Purposeful real estate investing is about valuing specific property types. That requires understanding locations, construction, design, and real estate market trends.
With real estate, you generate income in two major ways. One is waiting for the value to rise and selling the real estate. The other is receiving steady cash flow from tenants.
Structured products
One of the newer and most complex alternative investments, structured products are pre-packaged financial assets combining interest and derivatives such as managed futures, swaps, and forwards.
Although a lesser-discussed type of alternative investments, structured products in the form of mortgage-backed securities and CDOs attracted attention back in 2007 due to their role in the financial crisis. Thus, investing in these products requires careful consideration and consultation with a professional financial advisor.
Cryptocurrency
This type of alternative asset has probably attracted the most attention from the broader public in recent years. Cryptocurrency is more accessible to lay investors than most other assets on this list.
It also stands out as quite liquid, as exchanging crypto for cash is usually easy. And there are many diverse crypto options to invest in. However, 90% of the market is believed to be divided among the top 20 cryptocurrencies.
However, keep in mind that the cryptocurrency market is very volatile, hard to predict, and a common target of scams and scandals. Thus, one should be aware of these dangers before investing big shares of their budget in cryptocurrency.
Tangible assets
Tangible assets are commodities and natural resources, like oil, precious metals, land, and agricultural products. Alternative investments in natural gas and oil can offer the biggest returns. However, they are largely prerogative of the richest investors and funds.
By investing in forests and agriculture, other investors can generate returns depending on wood industry trends and agricultural commodity prices.
Collectible items are a subclass of tangible assets worthy of separate attention due to their diversity and specifics.
Collectibles
Collectible items are tangible alternative investments you buy and hold with the expectation that their value will grow over time. Better-known collectible items that have thus far been used for successful alternative investment strategies could include the following:
- Pieces of art
- Comic books
- Rare antiques
- Vintage cars
- Stamps
- Rare coins
The list can go on indefinitely and change with trends, making the possibilities for alternative investment ideas endless. For example, sneakers have recently become investment-worthy collectibles.
Investing in collectibles requires knowledge of particular fields and the ability to keep the item safe and in top shape for years.
How to find new alternative investment opportunities?
One of the main challenges of finding new alternative investment opportunities is that many private markets are hard to peer into and understand. To overcome the obstacles created by the lack of transparency, you have to take an active interest in alternative markets and find reliable sources of information.
Consulting field experts
In some cases, you would need to become an expert in particular fields or consult one to find the best alternative investment opportunities. For example, profitable trading in paintings requires understanding the art of painting itself and art world trends. Even with such an understanding, it is advisable to use the services of professional consultants when making evaluations.
Using public web data
For other strategies, the most important tool is data analytics. Only information can break the thick walls of private markets and unveil alternative investment ideas.
Alternative investments require public web data, which is as versatile as the investment types themselves. For example, investments like real estate, private equity, and hedge funds can benefit greatly from leveraging relevant data.
For example, venture capital firms can use startup data to identify the most promising early-stage companies before others do. This alternative asset class can also leverage company funding data to learn about the current financial stance of various startups.
Firmographic and technographic data are beneficial for private equity investing as well as any strategy involving investments in private firms.
Corporate jet tracking is another successful source of investment intelligence. Tracking major investors to anticipate deals can lead to profitable decisions in traditional and alternative markets. However, one has to be careful with such data, as it can also lead to speculation.
In real estate investing, satellite imagery and geolocation are great sources of data. For example, geolocation data can help look into renting trends in particular areas, providing valuable investment insights.
Getting a financial advisor for investing in alternatives
Traditional and alternative investments differ in many ways. That means even if you have experience in one, it does not guarantee good results in the other.
When you start investing in alternative assets, it is wise to seek guidance from someone experienced. Luckily, some consultancy firms and accredited investors have expertise in alternative markets and can serve as financial advisors.
These advisors can point out alternative investment opportunities or give you the know-how to find them. Whether it is help from a friend or a paid service, doing it with someone else mitigates the high risks of investing in alternatives.
How to invest in alternative assets
Your options for investing in alternative assets depend on your financial standing. Most alternative investments require a considerable budget for accreditation and the investment itself.
You may also require accredited investor status from the SEC if the alternative assets are exempt from registration. Accreditation provides privileged access to angel investments, venture capital, hedge funds, and other alternative investment opportunities.
Another option is to join a firm in which accredited investors own equity. Such an entity would itself be considered an accredited investor.
Mutual funds and ETFs can provide alternative opportunities for those without accreditation. Once again, however, the price of investment can be an obstacle for many.
Buying cryptocurrency and other currently cheaper items with the potential to become collectibles are more accessible ways to invest. However, the potential of such assets is extremely hard to evaluate, which raises investment risks.
Conclusion
Alternative investing is versatile and exciting, and it can offer potentially high returns. However, the risk of big losses is always there. Thus, when considering these investments, gather as much investment data as possible, consult industry and investment experts, and be critical when choosing the alternative investment opportunities.
