Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts and they do not include stocks, bonds, and cash.
Most alternative investment assets are held by institutional investors or high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk.
Many alternative investments have high minimum investments and fee structures, especially when compared to mutual funds and exchange-traded funds (ETFs).
These investments also have less opportunity to publish verifiable performance data and advertise to potential investors.
Although alternative assets may have high initial minimums and upfront investment fees, transaction costs are typically lower than those of conventional assets, due to lower levels of turnover.
Most alternative assets are fairly illiquid, especially compared to their conventional counterparts.
Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare.1
Even when they don’t involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to their unregulated nature.
It is essential that investors conduct extensive due diligence when considering alternative investments.2
Alternative investments typically have a low correlation with those of standard asset classes. This low correlation means they often move counter to the stock and bond markets.
This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.