Everybody’s talking about alternative investments, but there seems to be a lot of confusion about what they are.
Well, here’s our stab at defining alternative investments — what they are and what they’re not. If you’re interested in learning about the alternative investments, this is a good place to start.
What Alternative Investments Are Not
Alternative investments are not equities (or stocks, Fixed Income, or bonds, and cash or cash equivalents — your “traditional” asset classes) that you buy on a Stock Exchange or through a bank or a brokerage firm.
Pretty simple so far, right?
But, what they can be is so varied that it might make your head spin. Carofin and its affiliates have been offering Accredited Investors private equity, debt or hybrid Securities for over two decades — a subset of this larger world of alternatives.
What Alternatives Are
So, what are alternatives? Alternative investments include every kind of non-traditional investment. They can be publicly traded or privately offered. They can include real estate and commodities, and many other non-traditional assets, and they may be offered in many different forms, such as hedge funds, private equity, private debt, structured products, and more.
Historically, institutional investors have been the ones to purchase these Securities; over time, high net worth (Accredited) individuals have begun investing in them, taking advantage of their proposed higher returns and suggested ability to reduce risk when included in an investment portfolio. And, with the creation of Regulation Crowdfunding, non-accredited investors now have easier access to these investments. (see “Crowdfunding Overview”)
Alternative Investment Forms
Listed below is a more extensive list of categories of alternative investments. We’ve made efforts to include as many as we can think of, but it may not be complete, and it’s growing all the time.
Alternatives may be purchased either through the public markets or privately and may come in the following forms:
- Venture Capital, Private Equity, and Private Debt (Carofin’s area of expertise)
- Real Estate Limited Partnerships, Real Estate Development Corporations and REITs
- Master limited partnerships
- Tax Lien Certificates and Tax Credits
- Stock or Membership Units in private Companies
- Managed Futures
- Hedge Funds, Distressed Debt Funds, Mezzanine Funds, certain types of mutual funds and ETFs, and other types of funds
- Derivative Products
These vehicles can invest in a wide variety of industry sectors, such as:
- Real estate in all its forms, including private mortgages
- Commodities, including precious metals, oil, gas, mineral rights and ethanol, agricultural products such as soybeans, wheat, corn, oats, coffee and cocoa, sugar, frozen concentrated orange juice, live cattle (Carofin and its affiliates have sold several Securities for live cattle operations), other metals, such as copper, lead, zinc, tin, aluminum, nickel, and others
- Equipment leasing
- Art, wine, coins, crypto-currencies, jewels and other collectibles
- Peer-to-Peer Lending
- Farm and timberland
- Structured Settlements
- Intellectual property such as copyrights, song rights, patents, and trademarks
Therefore, here are a few additional comments to bear in mind when considering alternatives:
- Many forms have high minimum investment thresholds.
- Most are illiquid compared to traditional asset classes; and
- Most have been designed for Accredited Investors who have, on the whole, more experience and financial wherewithal to understand the risk and the potential loss of capital.
However, there are risks and rewards in every form of investing. Investing in alternatives may provide a means to diversify your risk, reduce volatility, and increase return in your portfolio.
We invite you to turn next to “Why Invest in Alternative Investments? Here are 3 Reasons“ This outlines what effect alternative investments may have on an Investor’s portfolio.