Bring up the topic of investing and chances are a lot of people will point to conventional investments such as bonds, cash savings and stocks. While these are common with a lot of investors, especially individuals who want to start investing, they are only part of the broad range of investments that individuals can access; there’s a category known as alternative investments that individuals can tap into to grow their portfolios.
Massimo Acquaviva, 2R Capital Investment Management Limited co-CEO and co-founder, is an experienced businessman with a particular interest in investment training. Alternative investments can help investors seek returns from options that are not necessarily based on traditional financial markets.
Breaking Down Alternative Investments
Alternative investments cover a wide spectrum of assets and include real estate, natural resources, cryptocurrency, hedge funds and private equity funds, to name a few. Experienced investors look to them because their returns are from the ‘real economy’ rather than the conventional markets. For instance, investing in collectables such as antiques or fine wine provides the opportunity to invest in a real asset, as does investing in a clean energy project that has the potential to impact communities and lives.
The alternative investment market may not be the first option for many individual investors, but it is steadily growing in value. According to data provider Preqin, the amount of money invested in alternatives globally by the end of 2021 was about £12.2 trillion. Private equity funds make up a large majority of this figure, as do real estate and hedge funds.
The majority of alternative investments are held by high-net-worth individuals or institutional investors because they come with a level of risk, complexity and not-as-strict regulation compared to traditional investments. Alternative assets also tend to have less opportunity to publish performance data, and their transaction costs may also be lower. Lastly, they are also relatively illiquid, meaning they can’t be turned into cash as fast as a conventional investment.
Why Invest in Them?
There are a few reasons why individual investors should consider adding alternative investments to their portfolios. First, they provide an opportunity to diversify a portfolio and can protect against inflation. For example, investments in real estate tend to provide advantages from inflation-linked rent.
Second, and very importantly, alternative investments tend to behave differently from conventional investments, which is a good thing when managing risk and generating returns in uncertain economic conditions.