Understanding Alternative Investments: Risks, Rewards, and Everything in Between

By Kesaobaka Pelokgale

Alternative investments are a growing trend among investors who are seeking to diversify their portfolios and achieve higher returns. These types of investments are becoming increasingly popular as investors seek to move beyond the traditional categories of stocks, bonds, and cash, and look to invest in assets that offer greater diversification and potential for higher returns.

Types of alternative investments

Before we cover the advantages and disadvantages of alternative investments, let us take a look at the different types of alternative investments available to an investor

Real Estate: This includes buying and holding properties, investing in real estate investment trusts (REITs), or crowdfunding real estate deals.

Private equity: This refers to investing in private companies, either directly or through private equity funds, that are not publicly traded.

Hedge funds: These are investment funds that employ various investment strategies and techniques, such as leveraging and short selling, to generate returns.

Commodities: These are physical goods, such as gold, oil, and agricultural products, that are traded on exchanges or purchased directly.

Art and collectibles: This refers to investing in high-end art, rare collectibles, and other luxury items that have the potential to appreciate in value.

Cryptocurrencies: These are digital currencies that use encryption techniques to regulate the generation of units of currency and verify the transfer of funds.

Derivatives: These are financial instruments that derive their value from an underlying asset, such as options and futures contracts.

Peer-to-peer lending: This refers to lending money to individuals or businesses through online platforms that match borrowers with investors

Why alternative investments?

These investments are often riskier than traditional investments, but can also offer higher potential returns. In addition, many alternative investments are not directly correlated with traditional markets, which means that they can provide diversification benefits that are not available with traditional investments.

One of the primary benefits of alternative investments is their potential for higher returns. Real estate, for example, can provide rental income as well as appreciation in value over time. Commodities like gold can provide protection against inflation and economic uncertainty. Hedge funds and private equity can offer higher potential returns than traditional stocks and bonds, although they are also generally riskier.

Another benefit of alternative investments is their potential to provide diversification. By investing in assets that are not directly correlated with traditional stocks and bonds, investors can spread their risk across a variety of investments. This can help to reduce the overall risk of their portfolios and provide a buffer against market volatility.

However, alternative investments also come with their own unique challenges and risks. Many of these investments are not easily traded or liquid, which means that they can be difficult to sell quickly if needed. Additionally, some alternative investments require a significant upfront investment, which can be a barrier for many investors.

Another challenge with alternative investments is the lack of transparency and regulation. Unlike traditional investments, which are subject to strict reporting requirements and regulations, many alternative investments are not subject to the same level of oversight. This can make it difficult for investors to evaluate the risks and returns of these investments and may increase the potential for fraud or misconduct.

Despite these challenges, many investors are attracted to alternative investments for their potential for higher returns and diversification. To succeed with alternative investments, investors should carefully consider their goals, risk tolerance, and investment horizon, and should work with a qualified financial advisor who can help them evaluate the risks and opportunities of these investments.

In addition, investors should be prepared to do their homework and carefully evaluate each potential investment opportunity. This may include researching the investment, evaluating the track record of the investment manager or sponsor, and carefully reviewing the investment documents and disclosures.

Overall, alternative investments can be a valuable addition to a diversified portfolio, but they should be approached with caution and care. By working with a qualified financial advisor and taking the time to evaluate each investment opportunity, investors can make informed decisions that can help them achieve their financial goals.