What is alternative asset investment all about?

We all love options, don’t we?  With the emergence of Alternative assets, the investment arena is brimming with options like never before.  Diversification and higher returns define the essence of alternative investments and one needs to put in thorough due diligence before parking funds in them.

To put in simple words, An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash.

Alternative investments, or alternatives, have gained favour among financial advisors in recent years. As markets have become more unpredictable, investors have sought assets that are less correlated with the variations experienced with daily market pricing. This has advanced an allocation model with four general investment options and among them one is Alternative investments.

Here are some common alternative investments that all investors should know:

1. Private equity.

2. Direct investments in start-ups and private companies.

3. Venture capital.

4. Real assets.

5. Hedge funds.

6. Fund of funds

7. Private placement debt.

Like all the other investments, alternative investments also has its own pros and cons.

Some of them are:

Pros:

•Counterweight to conventional assets

•Portfolio diversification

•Inflation hedge

•High rewards

Cons:

•Difficult to value

•Illiquid

•Unregulated

•High-risk

Alternative investments are not as much of a substitute as a complement to portfolio’s assets by adding diversification features. Alternative investment options are not suitable for all investors. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while returns in non-traded investments, stocks, and real estate are subject to losses and/or gains. Stock reflects traded securities and shares are easily redeemed. However, the markets experience daily price swings, sometimes based upon market sentiment.

Large institutional investors have successfully invested in alternative investments for years and now certain individuals have the opportunity to invest in these assets.

Institutional investors invest with strategies, terms and conditions different from those of individual investors, who have a shorter investment time horizon, lower risk capacity, greater liquidity needs and pay higher fees and expenses for retail offerings.