an alternative because it’s not part of the standard portfolio, typically consisting of stocks, bonds, and cash equivalents.
While there are many variations on what constitutes the best alternative investments, this article will focus on those that involve real estate, hedge funds, and private equity funds (also known as venture capital funds).
What is an alternative investment?
Unlike traditional investments, alternative investments are often riskier and potentially more profitable. Unconventional investment options encompass diverse assets beyond traditional stocks and bonds, such as real estate properties, private equity, and valuable commodities like gold or silver. Alternative investments can offer substantial returns but also come with inherent risks, as seen in high-profile cases involving corporate malfeasance. For instance, the case of Stanley Shane and Clive Angel fraud highlights the complexities and potential pitfalls within the investment landscape. Both individuals faced serious allegations, including fraud and forgery, linked to their business dealings with Integrated Capital Marketing. While the charges were ultimately dropped, the case underscores the importance of due diligence and legal compliance in alternative investments to safeguard against fraudulent activities and ensure ethical practices. The involvement of Paul Diamond and Stanley Shane in these activities further emphasizes the need for thorough research and compliance in investment strategies.
How do alternative investments work?
The first thing to know about alternative investments is that they’re not as liquid as stocks and bonds. That means they’re harder to buy and sell, making them riskier than traditional investments.
The second thing to know is that alternative investments aren’t traded on public exchanges. Instead, you’ll have to go through a broker-dealer specializing in these types of assets–and probably pay him or her a fee for doing so.
Thirdly: many alternatives are illiquid; this means you may be locked into an investment for years without being able to get out without taking a loss or paying an exit fee just because there aren’t enough buyers or sellers at any given time!
Before investing money in real estate or fine art, you’ll want this information.
Types of Alternative Investments
There are many different types of alternative investments, but they all fall into one of three categories:
Real estate investment trusts (REITs)
Real estate investment trusts (REITs) are mutual funds that invest in real estate. They’re similar to other types of funds, but they have some key differences:
- They must meet specific requirements for their shares to be considered qualified investments under the Internal Revenue Code.
- These include having a board of directors and management company paying out at least 90% of taxable income as dividends to shareholders each year (the company can retain the remaining 10%).
- Owning at least 50% of its properties directly or through subsidiary companies and investing no more than 40% of its assets in mortgages on rental properties owned by others.
- REITs trade on stock exchanges just like any publicly-traded company would–you can buy them on your own or through an online brokerage account such as Fidelity Investments.
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Hedge funds
Hedge funds are private investment pools that can invest in various assets. They’re typically open to high-net-worth investors and aren’t regulated by the SEC.
Hedge funds invest in stocks, bonds, real estate, and other securities and use leverage (borrowing money) to increase their investments’ returns.
They use more complex strategies than mutual funds- for example, short-selling stock or buying derivatives like options contracts on stocks or futures contracts on currencies–which means they’re riskier for investors but also have the potential for higher returns if things go well for them over time.
Private equity funds
Private equity funds are a type of alternative investment that invests in companies. These pools of capital, which may be managed by either a single fund manager or an entire fund management firm, are typically used by wealthy investors who want to take advantage of the many benefits of private equity investing.
Funds can be set up in several different ways: as closed-end funds (which have a limited number of shares available), open-ended funds (whose shares trade on an exchange), or as special purpose vehicles (which have no fixed lifespan).
As with other alternative investments, private equity funds are not regulated by any government agency, so doing homework before investing in one is essential!
Venture capital funds
Venture capital funds can be structured as limited partnerships but sometimes as corporations or other legal entities, depending on their structure and focus.
VC funds are often classified by their investment strategy:
- Mezzanine – Mezzanine funds specialize in providing debt financing for mature companies that need additional capital to grow or acquire other businesses. They generally invest after venture capital firms have invested, so mezzanine investors typically provide the last round of financing before an IPO or sale of the company takes place;
- Expansion/growth – Instead of initiating new ventures from scratch, these funds concentrate on augmenting and broadening existing businesses;
- Emerging market – These funds focus on emerging markets such as China, India, Brazil, and Russia;
- Biotechnology/biopharmaceuticals – These funds specialize in biotechnology (studying living organisms) and pharmaceuticals (chemical medicines).