Alternative investments are no longer seen as a fringe concept. They’re a key part of the investment landscape and there’s more accessibility for the average retail investor.
There are economic considerations that are making alternative investments appealing right now.
First, inflation is at record highs and may continue on that upward trajectory throughout 2022. Investors need to be able to protect themselves against the inevitable erosion of the value of their savings that is going to create.
The stock market is also incredibly volatile right now. While there is money to be made in volatility in many circumstances, that’s not always the case.
Alternative investments look especially appealing if you can’t stomach the ups and downs of the stock market or you just want to diversify.
So what is an alternative investment?
It can be anything that doesn’t fall into the conventional categories of investments. Alternative investments can include art and antiques, commodities, real estate, private equity, venture capital, hedge funds, and managed futures, as a few examples.
Alternative investments tend to face fewer regulations from the SEC and aren’t typically very liquid.
With those things in mind, the following are specific alternative investments to take a look at this year.
Investing in digital art is one of the most exciting opportunities right now. Investing in art in the past was something reserved for the wealthy. Now, because of the growing market for crypto and NFT art, more companies, as well as everyday investors, are adding digital assets to their portfolios.
Recently, Beeple’s digital artwork Ocean Front sold for $6 million, and celebrities like Paris Hilton are getting in on the investment opportunity.
NFT or crypto art replicates the world of stores, museums, and art galleries. This is made possible through smart contracts that come from Ethereum. It’s a decentralized way to facilitate the NFT economy by connecting artists and content creators with collectors or buyers. Digital art takes away the typical barrier of entry.
NFTs stand for non-fungible tokens. These are digital certificates that guarantee someone owns an asset.
NFT-based art can be anything from a video game to a photograph or an image made with digital media.
Anyone can take their creative work, turn it into an NFT and then sell it on NFT marketplaces.
Private equity investments may not be an option for everyone, but when you take advantage of the opportunity, it gives you additional diversification beyond what you have available in public markets.
Private equity is outside the public stock market. Investors gain ownership in private companies.
You can invest in private equity through ETFs, which may be a good option if it’s new to you. ETF stands for exchange-traded funds. Private equity ETFs offer exposure to publicly-listed private equity companies. If you aren’t an accredited investor or aren’t able to meet the minimum requirements from private equity funds, this is also a good option.
Private debt is one of the most popular forms of alternative investment. Private debt is a lending or debt arrangement.
Investing in private debt will often mean you have the peace of mind of fixed returns. Your returns build up through interest until the debt is completely paid off. As an investor, it’s like you’re also taking on the role of a banker.
A lot of private credit funds are backed by floating-rate securities, so this protects you, as the investor, against spiking interest rates.
There are a lot of ways you can invest in private debt. For example, you can join a peer micro-credit program. There are a lot of platforms that are available extending the opportunity for small-scale credit, where members are like banks.
There are even new platforms that allow investors to gain diversification through exposure to merchant cash advances. This is a high-turnover type of lending with a lot of popularity among borrowers and investors alike.
Funds of Funds (FOF)
Funds of funds or FOF is also known as multi-manager investment. It’s a pooled fund that invests in other funds. Basically, what this means is that this is a portfolio with underlying portfolios of other funds. Typically, FOFs invest in either other mutual funds or hedge funds.
You can get broad diversification and asset allocation. FOFs can give you the chance to invest in hedge funds where you might not otherwise have the opportunity.
You get professional wealth management expertise and services.
You can also tap into diversified portfolios with differing underlying assets even with limited capital, which otherwise might be out of reach for you as a retail investor. Hedge funds otherwise usually require that an investor have a minimum net worth or make a six-figure minimum investment. Sometimes both are required.
REIT stands for real estate investment trusts, and they are a good addition to any portfolio. REITs provide good diversification and potentially higher returns, with lower overall risk. You can generate dividend income and capital appreciation, making for a good balance with cash, stocks, and bonds.
Real estate investment trusts own and sometimes manage a commercial real estate that produces income. That might mean they own the properties themselves or the mortgages. You can invest in the companies individually with an exchange-traded fund, or you can invest with a mutual fund.
There are several key categories of REIT. For example, there are retail REITs. A large percentage of retail REIT investments are in malls and freestanding retail. Retail REITs make money from charging rent to tenants.
Another category is healthcare REITs, which invest in healthcare-related real estate, including retirement homes, nursing facilities, hospitals, and medical centers. The success of healthcare real estate is directly linked to the healthcare system, and many rely on payments from Medicaid and Medicare.
Office REITs receive rental income from tenants who are usually in long-term leases.
Finally, there are mortgage REITs, which is another popular category. These don’t invest in equity but instead in mortgages, as the name indicates. There are a lot of factors that can influence these investments, like rising interest rates, which is something to be aware of.