Alternative investment

An alternative investment is an investment in asset classes other than stocks, bonds, and cash.
The term is a relatively loose one and includes tangible assets such as precious metals,[1] art, wine,
antiques, coins, or stamps[2] and some financial assets such as real estate, commodities, private
equity, distressed securities, hedge funds, carbon credits,[3] venture capital, film production,[4] financial
derivatives, and cryptocurrencies. Investments in real estate and forestry[5] are also often termed
alternative despite the ancient use of such real assets to enhance and preserve wealth. In the last
century, fancy color diamonds have emerged as an alternative investment class as well.[6]Alternative
investments are to be contrasted with traditional investments.

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 natures 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. 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.

Alternative Investments for Diversification and Hedging

Alternative investments typically have a low correlation with those of standard asset
classes, which makes them suitable for portfolio diversification. Because of this, many
large institutional funds such as pensions and private endowments have begun to
allocate a small portion of their portfolios, typically less than 10%, to alternative
investments such as hedge funds. Investments in hard assets such as gold and oil also
provide an effective hedge against rising inflation, as they are negatively correlated with
the performance of stocks and bonds.
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Alternative Investment Costs and Tax Considerations

Although alternative assets may have high initial upfront investment fees, transaction
costs are typically lower compared to conventional assets, due to lower levels of
turnover. Alternative investments held over a long period of time may result in tax
benefits, as investments held longer than 12 months are subject to a lower capital gains
tax in comparison to shorter-term investments.

Accessing Alternative Investments Through ETFs

While the majority of retail investors may have limited availability to alternative
investment opportunities, real estate and commodities such as precious metals are
widely available. ETFs now provide ample opportunity to invest in alternative asset
categories that were previously difficult and costly for the retail investor to access.
Investing in ETFs that have exposure to alternative assets has been mixed. As of June
2016, real estate ETFs have a five-year annualized return of 9.42%, while investing in
energy commodities has returned negative 21.27%. The Standard & Poors 500 index
(S&P 500) ETF returned 11.67% over the same period.

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