18 alternative investments investors should consider

Post summary:

• • What is an alternative investment?
  • What are the potential benefits of alternative investments?
  • What to know before considering alternative investing
  • 18 alternative investments to consider
  • Is alternative investing risky? 

Investment opportunities for inventors are becoming harder to score better returns. There is good news, however. Outside the world of stocks, bonds, funds and other pre-packaged products, investors should consider alternative investment vehicles.

Alternative investments include venture capital, private equity, p2p investing, hedge funds, real estate investment trusts, commodities, and tangible assets like precious metals, rare coins, wine, and art.

And how big is the alternative investment market?

According to research, the alternative investment industry is expected to grow by 59% by 2023, reaching $14 trillion. 

What is an alternative investment?

An alternative investment is any investment outside the traditional areas of cash, stocks and bonds. 

Alternative investments include intangible assets such as antiques, art, and wine and financial assets such as private equity and cryptocurrencies.

Alternative investments have a low level of correlation with traditional investments. Therefore, they are less exposed to market conditions and can be used to lessen the overall risk of your investment portfolio through diversification.  

Investing in assets often necessitates an exceptionally high level of analysis, as it can be challenging to determine their current market value. 

It’s up to individual investors to determine any alternatives they decide to include in their investment portfolios. 

The great news is that the amount of alternative investment options available to investors has risen over the past few years. 

What are the potential benefits of alternative investments?

Alternative investments can be an excellent way to diversify an investor’s portfolio and help reduce their exposure to stock market shocks, as with traditional investments. 

However, low-risk alternative investment options like antiques, art, coins and wine will likely make or lose little money. They are thus creating possibilities to generate some additional income.   

Although some investments are off-limits for retirement accounts, the list of alternative investments is still reasonably diverse, whether to grow an investor’s capital or provide an income. 

However, the benefits of alternative investments can go even further than only building wealth. 

By allocating investor money to more niche projects like startups or documentaries, some investors can feel good knowing they are contributing to a cause they care about.

What to know before considering alternative investing

Generating higher returns comes with higher risks —as is the case with alternative investment options. 

Suppose individual investors are considering multiple options from a list of alternative investments. In that case, they and their investment advisor must perform due diligence to determine which options suit each investor. 

This is accurate given that the performance of some alternative investment ideas is non-public, which can sometimes make an adequate risk assessment and investment performance challenging to analyse.

There will always be some element of risk involved, so it is crucial to consider all aspects before investing, and investors should be realistic about how much risk they are willing to accept. 

Investors should consider asking themselves the following:

• Are they able to afford these recurring fees?
• How easily can they withdraw their capital when they need it?
• How would they feel if they lost some of their wealth?

Once they feel confident in their answers, they should consider adding alternative investment ideas to their traditional investment portfolio. 

18 types of alternative investments for investors

1# Antiques, art, coins & wine

Whilst Antiques, art, coins, and wine may be considered hobbies rather than a form of investment, there are returns to be gained for those able to recognise a good bargain when they see one. 

Fine wine has long been a source of enjoyment and a reliable investment option. According to the Telegraph, several investors have seen returns of over 150% over five years.

Prices for antiques, classic cars, art, and collectables have also increased. However, these assets are often cyclable, so it’s critical to understand trends and when the next downturn may occur. Like a property, many antiques (but not all) are appreciated as they become older and harder to find.

Fine art is a sound investment because, historically, investors have received returns of around 5.3%.

However, whilst the stock and art markets do not usually rise and fall simultaneously, art still endures shifts that can make investing risky.

When buying coins to invest in, note two types: bullion coins and collectable coins. Bullion coins are produced by national governments, usually in highly desirable metals like gold. 

Bullion coins are not collectable because they don’t derive their value from their scarcity but because of the metal in which they are minted.

Collectable coins are valued not for their weight in precious metals but because few of them are made. As they are not in general circulation, they are scarce and, thus, highly collectable. 

2# Hedge funds

Hedge funds are managed by an investment manager who picks which funds to invest. They enable individual and group investors to diversify their portfolios in multiple asset (and complicated) structures, thus spreading the risk of a portfolio. 

Hedge funds have proven to be reasonably reliable at gaining returns for investors. However, they are commonly considered to be riskier, more aggressive, and exclusive than mutual funds.

Investors should also note that the fees charged for participating in these funds are higher than those charged for other investment vehicles. The fund manager takes a cut of the profits earned.

3# Peer-to-peer loans

Peer-to-peer lending has been rising rapidly during the past few years. Peer-to-peer platforms cut out the ‘middlemen’ in the crowdfunding lending process, thus reducing the fees involved in lending and obtaining profits. 

Because of this, both lenders and borrowers obtain better rates than if they went to their bank. 

P2P lending offers investors a more comprehensive range of investment options, thus diversifying their portfolios and minimising risk to their capital. Plus, P2P lending can begin with only a few euros/pounds/dollars, so it is an excellent option for new investors. 

Howard Marks of Oaktree Capital Management cites P2P as one unique niche where he feels there is more potential for bargains.  

4# Property & real estate

Commercial or residential property is a profitable asset in any portfolio for those seeking short and long-term returns. 

Property and real estate investments can be made in many ways. They could include buying undervalued properties, renovating them, and selling them for a profit. 

Other property and real estate investments include purchasing a share of commercial property through a peer-to-peer property-focused website where the platform manages and rents the property.

Property does have its risks: the market is generally cyclical and will experience periods of decreasing value. While this may impact shorter-term investors, the property has commonly been seen to increase in value and, thus, returns in the long term.

5# Farmland

Another unique alternative investment idea is to invest in farmland. Like investing in property, appreciation is the potential upside to purchasing farmland. 

Furthermore, investors can lease or sharecrop the farmland to make additional profits.

Since this is a niche investment, investors will want to collaborate with a property professional who specialises in farm real estate. 

Investors must also consider how long they will wait to see returns. Most farmland investors will only see returns after five years or more. 

6# Cryptocurrency

Cryptocurrency continues to attract much hype surrounding its technological potential, the blockchain. 

Cryptocurrencies are virtual currencies that aim to operate independently of a centralised regulating body. Crypto is the encryption used to ensure that transactions are encrypted and safe. 

The amount of virtual and digital currencies continues to grow, each claiming some form of uniqueness. Although, most will trace their lineage to the original cryptocurrency: Bitcoin.

Early adopter investors who foresaw its value before the craze hit a few years ago made a small fortune. 

However, those who joined too late probably made some losses as Bitcoin’s volatility caused its value to be wiped overnight. Even today, the original cryptocurrency remains volatile in the current COVID-19 world.

Furthermore, governments are still concerned about how cryptocurrencies and exchanges will be regulated. Investors should be aware that some currencies are likely to be abandoned entirely if governments view them as ‘unregulated’.

7# Private equity investing

Private equity investing is where investors, individually and as a group, invest in a company that does not publicly issue its stock. 

Investors contribute capital to the company and then receive returns on their initial capital investment once it reaches a particular life-cycle stage. For instance, this could be during an initial public offering (IPO) of stock or a merger. 

Private equity investment has often provided much-needed capital for startup companies in fields like:

• telecommunications 
• biotechnology
• SaaS
• alternative energy

The success of private equity investing depends on how well the company performs, which is risky even in the right economic environment. 

For this reason, investors typically have a hands-on role in shaping the management strategy of the growing company.

8# Venture capital

Like private equity investing, venture capital (VC) funds are another option for investing in early-stage ventures. The difference is that VC funds diversify investor risk by simultaneously investing in several early-stage companies. 

Still, early-stage investments are very high risk and far more likely to fail than to succeed. However, those that do well can make investors significant returns. 

In a typical VC fund, the goal is that at least one company will perform exceptionally, Thus covering the investment costs of all the losses contained in the other early-stage investments. 

It should be noted that venture capital investing is still one of the riskiest asset classes to invest in. Investor returns can take several years to materialise, and only some will see a return on their initial investment.

Always be aware that most early-stage companies have a high probability of failure.

9# Managed futures & options

Like hedge funds, managed futures funds are managed by fund managers. Future fund managers invest investors’ money in futures or options in the commodities, currency and interest rate markets.

Futures and options are primarily bets on how a specific equity or investment will perform. A future is a contract to buy a particular amount of a commodity, stock or even currency at a set price in the future on a set date. 

The bet’s buyer or seller can then profit depending on whether the actual price rises or falls according to the agreed-upon price.

Options work similarly because the buyer is provided with an option to buy the investment rather than an obligation. 

Managed futures keep investor portfolios diverse since they typically do not follow market trends. Still, the nature of predicting the performance of various commodity markets makes futures and options more risky.

10# Forex (foreign exchange)

Foreign exchange, or forex, is the selling and buying various currencies to exploit their value fluctuations. Known as arbitrage, it is counting on adjustments in currency market prices over time.

Currency prices fluctuate continually as world events unfold. Investors may wake up one morning to discover a national coup, natural disaster, or other circumstance that has caused their holdings in a specific currency to rocket up or plunge.

11# Financial derivatives

Financial derivatives include options, futures, forwards, and swaps. Derivatives are agreements in which an individual asset reaches a specific level and pays out to an investor. 

Futures and options (see alternative investment ideas 8#) are explained above. A swap is an asset exchanged between two parties, obtaining a preferential interest rate for both.

Derivatives have a lousy reputation because economists have linked the 2008 credit crisis to the unregulated derivatives market and the subsequent mortgage crisis. 

However, if used ‘wisely’, derivatives can minimise investment risk within a portfolio.

For instance, a fund manager might use commodity futures to offset potential losses in currency investments. 

Some derivatives, like futures and options, are relatively manageable for individual investors. Large institutional investors and managed funds usually manage swaps. 

12# Trade Finance

Trade finance facilitates trade between buyers (importers) and sellers (exporters) by providing the necessary financing for and reducing the risks associated with commercial transactions.

Given that some 80 to 90% of world trade relies on trade finance, it dramatically influences economic growth at both the local and international levels.

A typical trade finance loan funds the exporting company and is secured by the collateral being exported, usually some form of commodity or goods. 

Sales are generated when importers pay the exporter to deliver the materials. Once received, the exporter then can repay their trade finance loan(s). 

Trade financing offers a variety of financing options designed to expedite commercial trade whilst mitigating risks to investor capital.

13# Commodities

Commodities include assets and resources such as gold, oil, and other precious metals like copper, fossil fuels, agricultural crops, and livestock. 

Like the futures market, commodities are highly volatile because natural disasters and world events can directly impact prices. You only have to look this year to notice how the value of crude oil plummeted.

Agriculture is another volatile example. A considerable surplus of crop foodstuffs could make the price of that commodity fall dramatically. The following year, the country could experience drought, and the said crop value will rise as its scarcity triggers increased demand.

The safest way for individual investors to reap the benefits of rising commodity prices is to purchase many different commodities rather than focusing on one. 

By doing it their way, investors can eliminate some of the uncertainty from choosing which commodities might rise and fall at a given moment.

14# Gas & oil production

Gas and oil producers are faced with relentless pressure to grow production, and how they grow production is mainly through capital investments. 

This alternative investment can be appealing for diversifying an investor’s portfolio diversification. 

However, Gas and oil production is a volatile alternative, so investors should embrace themselves for both gains and losses and have a high-risk tolerance.  

15# Marine finance

Marine finance is financing the construction, scrapping, or acquisition of vessels like boats and ships. According to the International Marine Organization, over 90% of everything we consume travels by boat and sea, amounting to USD 12 trillion in 2017. 

However, investors must research marine finance, as it is highly influenced by market trends, including any downturns in the global markets or tariff hikes.  

Although it takes on some risk, marine finance could be a potentially exciting investment opportunity. 

16# Aviation finance

Aviation finance used to be a sound investment. However, the coronavirus pandemic has caused the airline industry to take a severe downturn. 

Before investing in aviation finance, investors should determine whether air travel will return to pre-COVID levels.

If investors wish to invest in aviation, working with a professional from a fund rather than directly financing is best. A professional will understand air travel market trends and industry regulations. 

Aircraft typically have a long life span of 20-25 years, meaning investors have a tangible asset in their corner. However, like most other tangible assets, aircraft do depreciate over time. 

17# Annuities

An annuity is an insurance product rather than an investment. Annuities pay a fixed sum per year for life (or a set period) and can be inherited by an heir. 

Annuities provide stable, long-term growth income for those who purchase them. Investors can manage the amount of income and risk they are comfortable with. 

The payout is usually when an individual retires and wishes to supplement their pension, retirement savings and other investments.

When investing in annuities, be mindful of the fees involved. They can add up, and withdrawal fees are costly.

18# Film

An alternative investment option is to invest in producing films or movies.

Although this is undoubtedly alluring before investors think about the glamour of a Hollywood spectacle, most film investment revolves around documentary and art-house films. Thus, it can be risky, as the film may need to succeed more.

Kickstarter has a list of films that investors can consider investing in, but once again, it determines whether the audience is for the masses or a niche one, which will limit its viewers.

Investing in films does have the added benefit of supporting causes an investor cares passionately about and thus promoting them worldwide.

Are alternative investments riskier?

Of course, several individuals don’t believe alternatives belong in a portfolio. Some cite a need for more liquidity and transparency in their reasoning. This point does hold for specific alternative investments (although traditional investments, as per derivatives trading in 2008, are hardly open for scrutiny).

Other sources state that including alternatives and diversifying a portfolio increases the likelihood of generating lower-risk returns.

As with any investment, investors must be meticulous in due diligence before committing their cash to an alternative. Taking an in-depth look at investment requirements ensures the portfolio can accommodate the potential risk and long-term positions needed. 

Also, note that historical performance does not indicate future returns; if in doubt, always seek the guidance of a financial adviser.

Alternative investments are not only for deep-pocketed institutions and the very wealthy. 

Individual investors seeking to beef up their portfolios can now diversify and seek better returns by considering the many alternative investments available.

*The information contained in this article is provided for general informational purposes only. It should neither be construed nor intended as a recommendation to purchase, sell or hold any security or otherwise be considered investment, tax, financial, accounting, legal, regulatory or compliance advice.*