Meaning of Alternative Investment
Alternative Investment is a type of Investment that differs from the conventional investment categories such as Stocks, Bonds , etc. In terms of liquidity, most of the alternative investments are considered to be illiquid as compared to their conventional investment options. Due to their complexity, alternative investments are generally held by high net-worth individuals or institutional investors. If you are looking to understand the various types, your search ends here!
Below are the types of alternative Investments –
1. Private Equity
Private equity is a renowned area of Investment. It refers to capital investments made in privately-held entities or companies which are not publicly listed. The following are subsets of private equity:
- Venture capital – It deals with early-stage investing in start-up ventures
- Growth capital – It deals with helping mature entities restructure or expand their business
- Buyouts – It deals with the outright purchase of a company or any of its division
Private equity offers more than capital to the receiving company. Several benefits offered are – assistance in talent sourcing, industry expertise, and mentorship to leadership.
2. Hedge Funds
The goal of hedge funds is to pocket a high return on the Investment. Hedge funds are an asset class selectively available to HNIs and institutional investors. They trade comparatively liquid assets, and hedge fund managers carry specialized skills to implement their strategies. Their strategies can be quantitative, long-short equity, and market neutral.
3. Real Estate
There are a variety of tangible assets in the market, such as land, farmland, artwork, etc. Real estate is regarded as the most significant asset class amongst these as it has features similar to that of bonds. The landowners also enjoy capital appreciation, i.e., an increase in the value of their assets in the long term.
Valuation is quite a challenge for the other tangible assets. The valuation methods used for real estate are as follows –
- Discounted cash flows
- Income capitalization
- Comparative sales
To succeed as a real estate investor, paying attention to valuation skills and excelling is necessary.
Commodities are another tangible asset and include natural resources, such as oil, gas, industrial metals, and agricultural products. The value varies based on the supply and demand factors. When there is a higher demand, it results in a higher level of investor profit.
The following items are included under the Collectibles:
- Vintage cars
- Rare wines
- Exquisite art
- Coins and stamps
These items require good maintenance to expect appreciation in the future. Although investing in collectibles can sound interesting, it is to be noted that they come bearing a high acquisition cost. It can be equally risky as there is no income from this Investment in the form of dividends or another source until a sale is made. Investors with good industry experience prefer investing in collectibles.
Any Investment requires a good understanding of the asset class and the market. Investors must analyse the internal and external factors that may or may not affect the price/value of the asset class. A safe and structured investment can be made once you are comfortable and willing to go all-in with the required skills and knowledge.