What Exactly are Alternative Investments?
The easiest way to think of “alternative investments” is that it’s a bundled grouping of many different investment assets that are not publicly-traded stocks and bonds.
These can include assets such as real estate, private equity, hedge funds, commodities, art, antiques, and even cryptocurrency. Alternative investments often attract investors seeking diversification beyond traditional portfolios, aiming for potentially higher returns or a hedge against market volatility.
While they can offer unique opportunities, these investments also come with their own set of risks and complexities. They tend to be less liquid, meaning they can’t be easily sold or exchanged for cash without a significant loss in value. Additionally, they often require a higher level of expertise and due diligence to manage effectively.
Despite these challenges, the allure of alternative investments continues to grow, especially among those looking to enhance their portfolio’s performance or protect their wealth against economic downturns. By understanding the nature and demands of these investments, individuals can better navigate the intricate landscape of financial opportunities that lie beyond the conventional market.
Private Equity
Private equity (PE) is a significant alternative investment form, focusing on equity in privately-held firms with the aim of adding value over time. Key styles of private equity include:
- Buyouts or Leveraged Buyouts (LBOs): Involves purchasing and managing an entire business, often using debt to enhance returns.
- Venture Capital (VC): Provides funding to early-stage companies, supporting innovative management teams. Though failure rates are high, successful ventures can yield substantial returns.
- Growth Equity: Encompasses investments aimed at enhancing growth and operational efficiencies without taking control, focusing on long-term value creation.
Private Credit
Private credit is an umbrella term for many different kinds of loans and fixed income instruments that are neither publicly-traded bonds nor loans originated by traditional banks. Private credit lenders provide capital to companies (private or public) in a direct and privately-negotiated and structured offering.
Private credit funds invest across the debt capital structure, from convertibles and mezzanine debt to specialty financing and senior lending. And while there are exceptions, one major benefit to most private credit instruments is that they tend to structure interest payments on a “floating rate” basis, meaning that private credit investors are more insulated from changes in prevailing market lending rates than fixed rate public debt investors.
Hedge Funds
Hedge fund investment strategies vary widely, focusing on either macroeconomic factors or relative value between assets. For example, a “long-short” hedge fund invests in promising companies while betting against underperforming ones. Some funds adopt a “multi-strategy” approach for diversified returns. Common themes include improving the risk-adjusted return profile of portfolios and employing unique strategies that are difficult to replicate.
Private Real Estate
Private real estate within alternatives generally refers to investments in privately-held property or real estate assets. This spans a wide spectrum, from owning and renting out a house or small strip mall, to buying farmland or timberlands, and all the way up to investing with real estate developers that build large commercial offices and apartment building complexes. Two additional things to note: First, while many private property investments are structured as real estate investment trusts (or “REITs”), these are distinct and different from publicly-traded REITs. Second, while most investors think of private real estate investments as solely equity investments, there are alternative investments within real estate that are credit-oriented, including construction or bridge financing, mezzanine lending, and distressed real estate investing.
Precious Metals
Perhaps the most familiar alternative investment among individual investors is an allocation to precious metals. The most common investments in this category are gold and silver, but many investors also invest in others such as platinum, palladium, and even precious gemstones like diamonds. We’d also note that other hard assets such as scarce commodities and rare earth materials are becoming more popular among alternative investors.
Crypto Assets
Crypto assets such as Bitcoin and Ethereum represent a newer form of alternative investments. While individual investors can invest in these on their own, many alternative investment funds are looking to provide opportunities to invest in cryptos that purport to have added benefits such as access to early stage investing (i.e. VC investing in crypto startups) or broader diversification. As you likely have seen, volatility in this asset class has been extremely high, and we at SAM do not currently think an allocation to cryptos is suitable for many investors.
Niche Alternatives
Additionally, there are myriad other types of investing and collecting that can be considered alts. Primarily this refers to many collectible assets that tend to appreciate in value given increasing demand relative to scarce supply. Examples include art, fine wines, sports memorabilia, and vintage cars.
Art enthusiasts invest in emerging artists or classic works, hoping for appreciation as reputations grow. Fine wines require careful storage and are valued by connoisseurs.
Sports memorabilia carries sentimental and investment value, enhanced by their historical stories. Vintage cars attract collectors for both status and potential returns. These alternative investments blend passion and profit, allowing for portfolio diversification while indulging interests. Success requires research, authenticity checks, and networking, with understanding market dynamics and risks being crucial for financial and personal rewards.
Fill out our form to self-accredit yourself to learn about future opportunities
and receive a copy of our Alternative Investments White Paper
Alternative Investments Disclosures
To invest in our alternative solutions, you must be an accredited investor. This requires a net worth of $1M (excluding your primary home) or an income of $200k (single) or $300k (married) for the past two years. Investors should also have a long-term investment horizon for part if their capital and be comfortable with limited access to their funds for extended periods.
You should consider investing in alternatives if you’re seeking new ways to diversify your portfolio, understand the risks involved, and are willing to accept potential volatility. These investments are ideal for those who are comfortable with long-term commitments and want to explore opportunities outside of traditional stocks and bonds.
Alternative investments provide a way to diversify your portfolio, seek higher returns, and access unique markets that may not correlate with traditional investments. However, these opportunities come with specific risks and rewards, making it important to fully understand them.
At Stansberry Asset Management (SAM), we offer the expertise to guide you through these complex investments, helping you make informed decisions that match your financial goals and risk tolerance.
The Importance of Manager Selection
Manager selection is probably the most important aspect of investing in alternatives that often gets overlooked. Selecting the right alternative investment manager matters. In fact, selecting the right investment manager is often more important to private investments than it is to public investments. The difference between the top quartile (or top 25%) and the bottom quartiles (or bottom 25%) of investment managers in the private markets is much greater than the difference in the public markets.