An alternative investment, also known as an alternative asset or alternative investment fund (AIF), is an investment in any

asset class In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having ...

excluding stocks, bonds, and

cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...

. The term is a relatively loose one and includes tangible assets such as

precious metals Precious metals are rare, naturally occurring metallic chemical elements of high economic value. Chemically, the precious metals tend to be less reactive than most elements (see noble metal). They are usually ductile and have a high lus ...

, collectibles (art, wine,

antiques An antique ( la, antiquus; 'old', 'ancient') is an item perceived as having value because of its aesthetic or historical significance, and often defined as at least 100 years old (or some other limit), although the term is often used loosely ...

, cars, coins, musical instruments, or stamps) and some financial assets such as

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...

, private equity, distressed securities,

hedge funds A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...

, exchange funds,

carbon credits A carbon credit is a generic term for any tradable certificate or permit representing the right to emit a set amount of carbon dioxide or the equivalent amount of a different greenhouse gas (tCO2e). Carbon credits and carbon markets are a compo ...

, venture capital, film production,

financial derivatives In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be u ...

cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It i ...

non-fungible tokens A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership. The ownership of an NFT is recorded in the b ...

, and tax receivable agreements. Investments in real estate, forestry and

shipping Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ex ...

are also often termed "alternative" despite the ancient use of such real assets to enhance and preserve wealth. Alternative investments are to be contrasted with traditional investments.

Research

As the definition of alternative investments is broad, data and research vary widely across the investment classes. For example, art and wine investments may lack high-quality data. The Goizueta Business School at

Emory University Emory University is a private research university in Atlanta, Georgia. Founded in 1836 as "Emory College" by the Methodist Episcopal Church and named in honor of Methodist bishop John Emory, Emory is the second-oldest private institution of h ...

has established the Emory Center for Alternative Investments to provide research and a forum for discussion regarding private equity, hedge fund, and venture capital investments.

Access to alternative investments

In recent years, the growth of alternative finance has opened up new avenues to investing in alternatives. These include the following:

Art

In a 1986 paper, William Baumol used the repeat sale method and compared prices of 500 paintings sold over 410 years before concluding that the average real annual return on art was 0.55%. Another study of high-quality oil paintings sold in Sweden between 1985 and 2016 determined the average return to be 0.6% annually. However, art gallerists are sometimes ambivalent to the idea of treating artwork as an investment. Art is also notoriously difficult to value, and there are quite a few factors to bear in mind for

art valuation Art valuation, an art-specific subset of financial valuation, is the process of estimating the market value of works of art. As such, it is more of a financial rather than an aesthetic concern, however, subjective views of cultural value p ...

Equity crowdfunding

Equity crowdfunding platforms allow "the crowd" to review early-stage investment opportunities presented by entrepreneurs and take an equity stake in the business. Typically an online platform acts as a broker between investors and founders. These platforms differ greatly in the types of opportunities they will offer up to investors, how much due diligence is performed, degree of investor protections available, minimum investment size and so on. Equity crowdfunding platforms have seen a significant amount of success in the UK and, with the passing of JOBS Act Title III in early 2016, are now picking up steam in the United States.

Infrastructure as an asset class

The notion of “infrastructure as an asset class” has grown steadily in the past seven years. But, so far, this development has been the preserve of institutional investors: pension funds, insurance companies and sovereign wealth funds, with very limited access to high-net-worth investors (except a few large

family office A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with at least $50-$100 million in investable assets, with the goal being to effectively grow and transfe ...

s).

SEIS and EIS funds

Only available in the UK, SEIS funds and EIS funds present a tax-efficient way of investing in early-stage ventures. These work much like venture capital funds, with the added bonus of receiving government tax incentives for investing and loss relief protection should the companies invested in fail. Such funds help to diversify investor exposure by investing in multiple early ventures. Fees are normally charged by the management team for participating in the fund, and these can end up totaling anywhere between 15% and 40% of the fund value over the course of its life.

Lease investing

Lease investing platforms provide investors with options to co-invest and have partial ownership in physical assets that earn lease income. Through these platforms, investors can have fractional ownership of a particular asset leased to an organization and earn fixed returns.

Private equity

Private equity consists of large-scale private investments into unlisted companies in return for equity. Private funds are typically formed by combining funds from institutional investors such as high-net-worth individuals, insurance companies, university endowment funds and pension funds. Funds are used alongside borrowed money and the money of the private equity firm itself to invest in businesses they believe to have high growth potential.

Venture capital

Venture capital consists of private investments made into young start-up companies in exchange for equity. Venture capital funds are typically formed by drawing capital from

seed money Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' ...

, or

angel investors An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owner ...

. Nowadays,

crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by cro ...

is also used by start-up companies for capital.

Accredited investors An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor (if any), and the consequences of being classified as such, vary between countries. Generally, acc ...

such as high-net worth individuals, banks, and other companies will also invest in a start-up company if it grows to a large enough scale.

Investors

The 2003 Capgemini World Wealth Report, based on 2002 data, showed high-net-worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007, this had reduced to 9%. No recommendations were made in either report about the amount of money investors ''should'' place in alternative investments. As of 2019, the global breakdown of financial assets included a 13% allocation to alternative investments. Gold bullion 2

Characteristics

Alternative investments are sometimes used as a way of reducing overall investment risk through

diversification Diversification may refer to: Biology and agriculture * Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes * Agricultural diversification involves the re-allocation of some of a farm's resources to n ...

. Some of the characteristics of alternative investments may include: *Low correlation with traditional financial investments such as stocks and bonds *It may be difficult to determine the current market value of the asset *Alternative investments may be relatively illiquid (see " liquid alts") *Costs of purchase and sale may be relatively high *There may be limited historical risk and return data *A high degree of investment analysis may be required before buying

Liquid alternatives

Liquid alternatives ("alts") are alternative investments that provide daily liquidity. Liquid alternative investments should produce returns uncorrelated to GDP growth, must have protection against systemic market risk and should be too small to create new systemic risks for the market. Hedge funds may be included in this category; however, traditional hedge funds may have liquidity limitations, and the term is usually used for registered mutual funds which use hedge fund strategies such as long-short equity investments.

United States

Liquid alternatives became popular in the late 2000s, growing from $124 billion in assets under management 2010 to $310 billion in 2014. However, in 2015 only $85 million was added, with 31 closed funds and a high-profile underperformance by the largest long-short equity fund at the time, Marketfield Fund. In 2014 there were an estimated 298 liquid alternative funds with strategies such as long-short equity funds; event-driven, relative value, tactical trading (including managed futures), and multi-strategy. This number does not include option income funds, tactical shorting and leveraged indexed funds. There has been expressed skepticism over the complexity of liquid alts and the lack of able portfolio managers. One of the world's largest hedge fund managers,

AQR Capital AQR Capital Management (Applied Quantitative Research) is a global investment management firm based in Greenwich, Connecticut, United States. The firm, which was founded in 1998 by Cliff Asness, David Kabiller, John Liew, and Robert Krail, offers ...

, began offering funds in 2009, and grew from $33 billion in assets under management (AUM) in 2010 to $185 billion in AUM in 2017 driven in part by marketing mutual-fund like products with lower fees. As of 2016, AQR Capital was the largest manager of liquid alts.

References

External links

''Portfolio Diversification benefits of Investing in Stamps'' by Chris Veld, University of Stirling. (Incomplete first draft)What are alternative investments?
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