Understanding Alternative Investments

Kiran Shroff
/ Categories: Knowledge, General
Understanding Alternative Investments

Let's understand Alternative Investments with examples.

What Are Alternative Investments?  

A financial asset that does not fit into one of the traditional investment categories is known as an alternative investment. Typical categories include securities like stocks, bonds and cash. Private equity or venture capital, hedge funds, managed futures, art and antiquities, commodities and derivatives contracts are examples of alternative investments. Another popular category for alternative investments is real estate.  

Understanding Alternative Investments  

Because of their complexity, lack of regulation and degree of risk, the majority of alternative investment assets are owned by accredited, high-net-worth individuals or institutional investors. Particularly when contrasted with mutual funds and exchange-traded funds, many alternative investments have high minimum investment requirements and cost structures. A gold coin that is 200 years old is going to be much harder to sell than 1,000 shares of MRF Ltd. because there aren't as many customers for it. Particularly in comparison to their traditional counterparts, the majority of alternative assets are very illiquid.  

How Can Alternative Investments Be Useful to Investors?  

Alternative investments are appealing to some investors because they have a low correlation with the stock and bond markets, which means they retain their value during a market downturn. Furthermore, hard assets such as gold, oil and real estate are effective inflation hedges. Many large institutions, such as pension funds and family offices, seek to diversify some of their holdings in alternative investment vehicles for these reasons.  

Example of Alternative Investments  

Example No: 1  

Nishika began her search for an asset that would not be affected by market fluctuations. Sanika, a stock advisor, was consulted. She advised her against investing in traditional paper assets such as individual stocks or bonds. Rather, she advocated for commodities such as oil, grain, gold, other metals and natural gas, which are less affected by negative market movements. Furthermore, she informed Nishika that investing in tangible commodities would provide her with a hedge against loss. As a result, the investor took Sanika’s advice and invested at least 5 per cent of her portfolio in tangible assets.  

Example No: 2  

Since its inception in the 1940s, the private equity industry has operated without regulatory oversight. However, following the 2008 financial crisis, it was labelled under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Furthermore, there has been a recent increase in the call for transparency and the US Securities and Exchange Commission (SEC) has begun collecting data on private equity firms.  

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