What is an Alternative Investment

An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds, and cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex nature and limited regulations of the investments. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.

BREAKING DOWN Alternative Investment

Many alternative investments have high minimum investments and fee structures compared to mutual funds and exchange-traded funds (ETFs). There is also less opportunity to publish verifiable performance data and advertise to potential investors.

  • Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.
  • Most alternative investments are unregulated by the SEC.
  • Alternative investments tend to be somewhat illiquid.
  • While traditionally for institutional investors and accredited investors, alternative investments have become feasible to retail investors via alt funds, ETFs and mutual funds that build portfolios of alternative assets.

Regulation of Alternative Investments

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.

Most alternative assets have low liquidity compared to conventional assets. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple, due to a limited number of buyers.

Investors may have difficulty valuing alternative investments due to transactions often being unique. For example, a seller of the extremely rare 1933 Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist as of 2016. Alternative investments are prone to investment scams and fraud due to their unregulated nature, therefore it is essential that investors conduct extensive due diligence.

KEY TAKEAWAYS

  • An alternative investment is a financial asset that does not fall into one of the conventional equity/income/cash categories.