Many investors believe that investments are limited to stocks, mutual funds, bonds, etc. While these traditional investments work for many, a very niche set of investors knows that there’s a lot more potential with Alternative Investments.
What are Alternative Investments? Why don’t many investment education channels talk about them? What are the benefits of alternative investments? And how can a beginner invest in alternative investments? Read on to get answers to these questions and more in this blog:
So, what are alternative investments?
Any non-traditional asset or investment strategy is teamed with alternative investments. Confused?
Let’s simplify this further, no one particular asset or asset class can be classified as an alternative investment. In fact, any investment that cannot be categorized as stocks, mutual funds, exchange-traded funds, government bonds, or cash, will be a part of alternative investments.
Alternative investments are often also referred to as alternative assets or alternative assets. Tangible assets like precious metals, collectables (antiques, wines, stamps, coins), real estate, commodities, private equity, venture capital, film production, financial derivatives, sovereign gold bonds, cryptocurrencies, and NFTs, are often termed alternative investments.
Now that we know what alternative investments are, let’s look at what are the advantages of these investments?
Benefits of alternative investments:
- Alternate offer higher returns
When we invest in anything, we often look at its past performance and rate of return. Thus, many investors get drawn to the potential returns offered by alternative assets. While returns can never be guaranteed, be it traditional or non-traditional assets, alternative assets show the potential to offer higher returns. We have all heard high risk equals high returns, the same is the case with alternative investments.
- Less Volatility
Traditional markets have high volatility and long drawdowns like the 1914 and 2008 crashes. Unlike the traditional methods, alternative investments rely more on the strength of each specific investment, and rarely on broad market trends. Thus, alternative assets potentially reduce the overall risk of a portfolio.
- Broader diversification
With little to no correlation to traditional asset classes, alternatives can be a beneficial way to diversify the portfolio.
- Easier to beat inflation
Most investments, like fixed deposits and corporate bonds, seldom manage to beat the inflation rate. Broadening your portfolio with alternative assets is a great way to potentially receive higher returns. When we speak of the benefits of alternative investments, we cannot speak about the Yale endowment model.
What is the Yale Endowment Model?
The Yale Endowment Model is an investment approach. David Swenson and Dean Takahashi invented the Yale Endowment Model to make strategic investments for the Ivy League University. It has been over 50 years since the inception of this Model and many investors have benefited from it.
The approach has a simple fundamental wherein it suggests spreading risks and avoiding safe bets by spreading the capital across different investment options. It involves diversifying a portfolio into 5-6 equal parts invested in different asset classes.
Swenson and Takahashi developed this model to make the most use of the ability to invest very often, take maximum advantage of tax exemption, and make investments into venture capital funds, upcoming and modern technology, and other hedge funds. The Yale Model gained popularity due to its success rate and rare investments made across these types of assets. Many investors prefer the Yale Model as it allows investors to spread their capital and ease diversification while attracting high returns.
However, now the real question is why were alternative investments alien to common investors?
Traditional investment options are the most discussed in India. Be it on news channels, investment channels, individual groups, or even with friends and families. The non-traditional investment options were considered too risky and not everyone’s cup of tea. All that is changing now. With new technology and investment education channels are changing a lot. Insights about alternative investments are openly shared and anyone who is interested in the same can research and understand alternative investments.
Thus today, an investor can look beyond the traditional investment options and choose alternative investments.
Where there is demand, supply is not far behind. A lot of platforms have emerged in the last few years that help retail investors smoothly invest their capital in alternative assets. Platforms like YieldStreet, fundraise, Artivest, Rally, Wefunder, etc are some of the top platforms specializing in alternative investment options.
While anyone can invest in alternative assets today, many still believe alternative assets are not everyone’s cup of tea. We also need to look at the risks more seriously.
What are the risks involved with alternative investments?
- Liquidity
The biggest risk associated with alternative investment is liquidity. With traditional investments it’s easier to square off your position, the same cannot be done in the case of alternative investments. There is no guarantee that you will be able to sell your investments when you want to. With alternative assets, fund managers may only allow quarterly redemptions or there may be a lock-in period. Due to this investor will not get access to their money when they need it.
- Deal Specific Risk
Every deal is different from the next in alternative investment. Thorough research is a must while investing in alternative assets to avoid deal-specific risk. What’s the lock-in period, what’s the past performance, what does the future hold, how much return are you expecting, how and when can you start withdrawing your profits or capital, and can you trade off your deal? One must get answers to all such questions and more while investing in alternative assets.
- Alternative Investment Platform
Choosing the right alternative investment platform is equally crucial. You don’t want to end up in a rocking boat. You must check the background of the platform, ask friends/family if they have used the platform before, check social media for its reviews, and more. Due diligence regarding the platform is as important as understanding the investment options.
All in all, alternative investments are a must to diversify your portfolio. When done right, the returns outweigh the risks of alternative investment. However, never invest in any asset, traditional or non-traditional, with little or no information about it. Research, read, look at the past performance, study the people involved and do all the due diligence before investing in alternative assets. While it’s true that all investments carry risks, it’s up to every investor to determine what risks they are comfortable with.
