What are Alternative Investments?
Alternative investments are those that do not fall into traditional asset classes such as stocks, bonds, and cash. They are typically illiquid, meaning they cannot be easily bought or sold, and require a longer holding period. Alternative investments can provide investors with diversification and the potential for higher returns, but they also come with higher risk and volatility.
Types of Alternative Investments:
Real Estate: Real estate is a popular alternative investment and involves the purchase, ownership, management, rental, or sale of real estate for profit. This can include residential or commercial properties, and investors can participate through direct ownership or through a real estate investment trust (REIT).
Private Equity: Private equity involves investing in private companies that are not listed on public stock exchanges. This can include venture capital, growth equity, and buyout funds.
Hedge Funds: Hedge funds are investment funds that use a variety of strategies to generate returns, such as long/short equity, global macro, and event-driven strategies.
Commodities: Commodities are physical goods such as gold, silver, and oil, that are traded on exchanges. Investing in commodities can provide diversification and protection against inflation.
Cryptocurrencies: Cryptocurrencies are digital assets that use cryptography to secure transactions and control the creation of new units. They are decentralized and not controlled by any central authority.
Alternative Investment Strategies:
Market Neutral: Market neutral strategies aim to generate returns regardless of market conditions by using long and short positions to offset risk.
Event-Driven: Event-driven strategies seek to profit from corporate events such as mergers, acquisitions, and bankruptcies.
Global Macro: Global macro strategies involve taking positions in a variety of asset classes based on macroeconomic trends and geopolitical events.
Managed Futures: Managed futures involve investing in futures contracts on commodities, currencies, and other assets.
Long/Short Equity: Long/short equity strategies involve buying stocks that are expected to increase in value and shorting stocks that are expected to decrease in value.
Latest Trends and Facts:
According to a survey by Preqin, alternative assets under management (AUM) reached a record $14tn in 2020, up from $10tn in 2015.
Real estate is the largest alternative asset class, with AUM of $4.7tn in 2020, followed by private equity at $4.5tn.
Hedge funds saw outflows of $98.7bn in 2020, the largest outflows since the global financial crisis in 2008.
Cryptocurrencies have seen a surge in popularity, with Bitcoin reaching an all-time high of over $60,000 in March 2021.
Environmental, Social, and Governance (ESG) investing is becoming increasingly popular in the alternative investment space, with investors looking to invest in companies that are making a positive impact on society and the environment.
Conclusion:
Alternative investments can provide investors with diversification and the potential for higher returns, but they also come with higher risk and volatility. Real estate and private equity are the largest alternative asset classes, and hedge funds have seen outflows in recent years. Cryptocurrencies have seen a surge in popularity, and ESG investing is becoming increasingly popular in the alternative investment space. As always, investors should carefully consider their investment objectives and risk tolerance before investing in alternative