{"id":1733,"date":"2022-06-17T19:48:08","date_gmt":"2022-06-17T19:48:08","guid":{"rendered":"https:\/\/blog.ark7.com\/?p=1733"},"modified":"2024-01-31T18:29:01","modified_gmt":"2024-01-31T18:29:01","slug":"alternative-investments-what-are-the-key-characteristics","status":"publish","type":"post","link":"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/","title":{"rendered":"Alternative Investments: What Are the Key Characteristics?"},"content":{"rendered":"<div class=\"boldgrid-section\">\n<div class=\"container\">\n<div class=\"row\">\n<div class=\"col-lg-12 col-md-12 col-xs-12 col-sm-12\">\n<p class=\"\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1735\" src=\"https:\/\/blog.ark7.com\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1.png\" alt=\"\" width=\"1000\" height=\"350\" srcset=\"https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1.png 1000w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-300x105.png 300w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-768x269.png 768w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-250x88.png 250w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-550x193.png 550w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-800x280.png 800w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-514x180.png 514w, https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_header-1000_350-1-857x300.png 857w\" sizes=\"auto, (max-width: 1000px) 100vw, 1000px\" \/><\/p>\n<p class=\"\"><span style=\"font-weight: 400;\">If you\u2019re an investor looking to diversify your portfolio with\u00a0<\/span><span style=\"font-weight: 400;\">alternative investments<\/span><span style=\"font-weight: 400;\">, you\u2019re in the right place. In this post, we\u2019ll outline the key characteristics of alternative investments, including the benefits and effective strategies to help you get started diversifying your portfolio.<\/span><\/p>\n<h2 class=\"\"><b>What Are Alternative Investments?<\/b><\/h2>\n<p class=\"\"><span style=\"font-weight: 400;\">Alternative investments allow investors to minimize their risk and diversify their portfolios by seeking investments outside of the conventional stock market. Examples of alternative investments include\u00a0<\/span><a href=\"https:\/\/www.ark7.com?tc=GM2ET\"><span style=\"font-weight: 400;\">real estate<\/span><\/a><span style=\"font-weight: 400;\">, hedge funds, venture capital, commodities and private debt. We\u2019ll go over these popular categories in more detail below.<\/span><\/p>\n<h3 class=\"\"><b>Real Estate<\/b><\/h3>\n<p class=\"\"><span style=\"font-weight: 400;\">Alternative investors in\u00a0<\/span><a href=\"https:\/\/ark7.com\/blog\/articles\/new-property-offering-value-added-short-term-philly-rental-property\/\"><span style=\"font-weight: 400;\">real estate<\/span><\/a><span style=\"font-weight: 400;\">\u00a0often invest in office buildings, shopping malls, storage units and\u00a0<\/span><a href=\"https:\/\/ark7.com\/blog\/articles\/brrrr-real-estate-investment-tactic-made-simple\/\"><span style=\"font-weight: 400;\">residential apartments and condos<\/span><\/a><span style=\"font-weight: 400;\">. Investors who don\u2019t want the hassle of playing landlord opt for crowdfunding real estate investments which allow them to reap the benefits of growth without having to worry about rent being paid on time, the broken pipes in 24A, or the fighting couple in 9B.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Similar to other real assets, valuation is challenging in real estate investing. Valuation methods include:<\/span><\/p>\n<ul class=\"\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Income capitalization.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Sales comparable.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Discounted cash flow.<\/span><\/li>\n<\/ul>\n<h3><b>Private Equity<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Private equity investors invest their money in companies that are not publicly traded. The downfall of this alternative investment is that investors may not have access to their cash for as long as ten years.<\/span><\/p>\n<h3 class=\"\"><b>Venture Capital<\/b><\/h3>\n<p class=\"\"><span style=\"font-weight: 400;\">Venture capital is a subset of private equity and is the process of investing in early-stage companies or startups that have great potential for growth or those that are expanding rapidly in new or innovative spaces. The downfall with this alternative investment is that it\u2019s a rather high-risk investment and comes with a high chance of failure because a lot of the companies don\u2019t have revenue or profits at the time of the initial investment. Of course, if the company succeeds, it comes with a high reward for the investor.<\/span><\/p>\n<h3><b>Private Debt<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Private debt is a term that refers to any investment that is not financed by banks or traded on an open market. It\u2019s typically leveraged when businesses need additional funding to grow. Companies that issue this type of capital are called private debt funds. They make money in two ways:<\/span><\/p>\n<ul class=\"\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Interest payments.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Repayment of the initial loan.<\/span><\/li>\n<\/ul>\n<p class=\"\"><span style=\"font-weight: 400;\">Private debt, which is also referred to as private credit, presents a chance for investors to potentially gain higher yields compared to public market offerings. Types of private debt include mezzanine and senior debt, which are both considered higher on the payout structure in cases dealing with default and are therefore considered less risky. The riskier investment in this asset class is in distressed credit, in which people invest in the debt of companies under stress \u2014 as the name suggests.<\/span><\/p>\n<h3 class=\"\"><b>Hedge Funds<\/b><\/h3>\n<p class=\"\"><span style=\"font-weight: 400;\">This type of investment fund trades assets that are relatively liquid and deploys multiple investing strategies to earn a high return on investment. It\u2019s important to note that\u00a0<\/span><a href=\"https:\/\/online.hbs.edu\/blog\/post\/types-of-alternative-investments\"><span style=\"font-weight: 400;\">hedge funds are exclusive<\/span><\/a><span style=\"font-weight: 400;\">\u00a0and are only available to institutional investors, including people with high-net-worths, pension funds, mutual funds and endowments.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One common hedge fund investment strategy is known as long-short equity, in which managers invest in a company with the potential to appreciate. But, they might also decide to sell short, betting against the company and would therefore profit if and when the company\u2019s value decreases.<\/span><\/p>\n<p class=\"\"><span style=\"font-weight: 400;\">Hedge funds also deploy absolute return strategies, which are also called \u201call-weather strategies.\u201d This strategy invests in a broad spectrum of asset classes and strategies to generate returns despite how conventional markets are performing.<\/span><\/p>\n<p class=\"\"><span style=\"font-weight: 400;\">A third common hedge fund strategy is called market neutral. Market-neutral funds aim to lower the systematic risk that\u2019s created by factors like investment styles, currencies, exposures to sectors and market-cap ranges.<\/span><\/p>\n<h3><b>Commodities<\/b><\/h3>\n<p class=\"\"><span style=\"font-weight: 400;\">Crude oil, corn, coffee, and other agriculture and natural resources make up the commodities asset class. Since these assets are real, they are commonly considered <\/span><a href=\"https:\/\/money.usnews.com\/investing\/investing-advice\/slideshows\/investments-to-offset-potential-inflation\"><span style=\"font-weight: 400;\">inflation hedges<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0This type of trade takes place in the futures market. It\u2019s important that commodities investors sell the contract before maturity and then purchase a new one to hold their position. The new contract may be more expensive than the old one, a common performance drag with this alternative investment option. Some commodities are also available via ETFs, including gold and oil.<\/span><\/p>\n<p class=\"\"><span style=\"font-weight: 400;\">Did you know that commodities have been traded for thousands of years? Amsterdam and Osaka, Japan both claim to have founded the <\/span><span style=\"font-weight: 400;\">earliest formal commodities exchange<\/span><span style=\"font-weight: 400;\">, dating back to the 16th and 17th centuries! It took until the mid-19th century until the Chicago Board of Trade started trading commodity futures in the United States.<\/span><\/p>\n<h3><b>Collectibles<\/b><\/h3>\n<p class=\"\"><span style=\"font-weight: 400;\">From rare wines to vintage cars and Jackie Robinson\u2019s baseball card, when you invest in collectibles, you purchase unique and valuable physical items with hopes their value will continue to appreciate over time. Although this is no doubt a fun and even glamorous type of investing to get into, it\u2019s also quite risky because of the high costs to acquire the goods, lack of dividends and other income until you sell the items and the potential for the items to get damaged, lost or stolen.<\/span><\/p>\n<h2 class=\"\"><b>Key Characteristics of Alternative Investments<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">As you can tell, alternative investments span a vast array of assets and strategies. But, in general, most alternative investments are characterized by the following:<\/span><\/p>\n<ul class=\"\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Low correlation to conventional investments, such as stocks, cash, and bonds. Alternative investments don\u2019t move the same way as the market conditions; some even perform better when the market drops.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Higher minimum investment is required typically.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Greater potential for returns than conventional investments.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Assets are more illiquid.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Shares and\/or interest gains cannot be redeemed or sold as needed, often take years to become liquid.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Investment structures and risk-return profiles are often complicated.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The risk profile is extremely unique and must be fully understood by investors before they invest.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Exposure to unique markets and investment opportunities they otherwise would not have had access to, such as the chance to be an early investor in an innovative startup, which can lead to large returns down the road.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They are not regulated by the\u00a0<\/span><a href=\"https:\/\/www.sec.gov\/about\/what-we-do\"><span style=\"font-weight: 400;\">U.S. Securities and Exchange Commission<\/span><\/a><span style=\"font-weight: 400;\">\u00a0(SEC).<\/span><\/li>\n<\/ul>\n<h3><b>Final thoughts<\/b><\/h3>\n<p class=\"\"><span style=\"font-weight: 400;\">The two main reasons to invest in alternative investments are portfolio diversification and enhanced returns. Of course, any investment should be well-researched and carefully considered. Remember, alternative investments are illiquid for a while and are therefore not suited for day traders or people looking to get rich quick. But, for patient investors, alternative investments are well worth the wait.<\/span><\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>If you\u2019re an investor looking to diversify your portfolio with\u00a0alternative investments, you\u2019re in the right place. In this post, we\u2019ll outline the key characteristics of alternative investments, including the benefits and effective strategies to help you get started diversifying your portfolio. What Are Alternative Investments? Alternative investments allow investors to minimize their risk and diversify &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\"> <span class=\"screen-reader-text\">Alternative Investments: What Are the Key Characteristics?<\/span> Read More \u00bb<\/a><\/p>\n","protected":false},"author":12,"featured_media":1734,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"default","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[109],"tags":[75,222,223],"class_list":["post-1733","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-alternative-investments","tag-alternative-investments","tag-best-alternative-investments","tag-infrastructure-alternative-investments"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Alternative Investments: What Are the Key Characteristics? - Ark7<\/title>\n<meta name=\"description\" content=\"Delve into the unique attributes of alternative investments, including their potential for high returns, access to niche markets, low correlation to conventional assets, and the importance of diversification and patience in this potentially complex, illiquid, and less regulated investment landscape.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Alternative Investments: What Are the Key Characteristics? - Ark7\" \/>\n<meta property=\"og:description\" content=\"Delve into the unique attributes of alternative investments, including their potential for high returns, access to niche markets, low correlation to conventional assets, and the importance of diversification and patience in this potentially complex, illiquid, and less regulated investment landscape.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\" \/>\n<meta property=\"og:site_name\" content=\"Ark7\" \/>\n<meta property=\"article:published_time\" content=\"2022-06-17T19:48:08+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-01-31T18:29:01+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/ark7.com\/blog\/wp-content\/uploads\/2022\/06\/Alternative_Investments_featured-585_330-1.png\" \/>\n\t<meta property=\"og:image:width\" content=\"585\" \/>\n\t<meta property=\"og:image:height\" content=\"330\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"The Ark7 Team\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"The Ark7 Team\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\"},\"author\":{\"name\":\"The Ark7 Team\",\"@id\":\"https:\/\/ark7.com\/blog\/#\/schema\/person\/5ab2b507abb19df7b43e8c52cd6127a8\"},\"headline\":\"Alternative Investments: What Are the Key Characteristics?\",\"datePublished\":\"2022-06-17T19:48:08+00:00\",\"dateModified\":\"2024-01-31T18:29:01+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\"},\"wordCount\":1093,\"publisher\":{\"@id\":\"https:\/\/ark7.com\/blog\/#organization\"},\"keywords\":[\"alternative investments\",\"Best Alternative Investments\",\"Infrastructure Alternative Investments\"],\"articleSection\":[\"Alternative Investments\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\",\"url\":\"https:\/\/ark7.com\/blog\/learn\/in-depth\/alternative-investments\/alternative-investments-what-are-the-key-characteristics\/\",\"name\":\"Alternative Investments: What Are the Key Characteristics? 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