Beginner’s Guide to Alternative Investments: Beyond Stocks & Bonds

Beginner’s Guide to Alternative Investments: Beyond Stocks & Bonds

Joel Colman

Joel Colman  -  14th May 2024

Alternative investments are those that fall outside the traditional asset classes of stocks, bonds and cash. From private equity and hedge funds to property, commodities and cryptocurrency, the term encompasses a huge range of asset classes, each with their own features and benefits.

But what are the characteristics of alternative investments? What advantages and disadvantages do they deliver when compared to traditional investments? And should you consider incorporating alternative investment strategies into your portfolio? Read on to uncover the answers.

What are alternative investments?

Alternative investments are financial assets that aren’t stocks, bonds or cash. Alternative investments you might have come across include:

  • Property – Whether it’s an investment in commercial real estate or one in residential or luxury property, this well-known alternative asset class can deliver long-term benefits (due to the increase in the value of property over time) plus regular, stable income (in the form of rent). You could also invest in a real estate investment trust (REIT), real estate crowdfunding platform or real estate mutual fund.
  • Private equity – Investing in companies that aren’t publicly listed (private equity) or in a start-up with the potential to grow substantially (venture capital) both offer high return potential.
  • Hedge funds – Generally unregulated, hedge fund managers combine alternative investment strategies to invest in asset classes from currencies to property, stocks and derivatives – with the goal of optimising returns.
  • Natural resources – This refers to investments in the development or production of raw materials (gold, silver and naturally-occurring substances) as well as those in agricultural products.
  • Infrastructure – Often undertaken in public-private partnerships, investments in energy (particularly renewables), logistics, transport and utilities are increasingly popular.
  • Art and other collectables – From art to artefacts and wine to sports memorabilia, it’s possible to turn your passion into an alternative investment that accumulates value over time – though bear in mind that some of these assets can be extremely difficult to value.
  • Cryptocurrencies – Relatively new as an asset type, digital currencies such as bitcoin are an increasingly popular yet volatile investment choice.

Valued at $13.7 trillion in 2021 and set to grow to $23.3 trillion by 2027, the alternative investments market is booming in popularity – and not just amongst institutional investors, its traditional audience. According to EY, alternative investments now feature in 29% of high-net-worth (HNW) investor portfolios, with the figure rising to 81% for ultra-high-net-worth (UHNW) investors.

Unlike traditional investments, alternative investments have low or no correlation to financial markets. This means that they bring balance – known as diversification in financial terminology – to investor portfolios and provide protection (aka hedging) against inflation. As a result, they’re particularly popular during market downturns and turbulence.

Alternative Investments key characteristics

What are the key characteristics of alternative investments?

While they encompass a huge range of asset types, alternative investments share certain characteristics. They’re typically low or non-market correlated, meaning that their performance isn’t impacted by stock market ebbs and flows. Plus, they can deliver significantly higher returns along with lower transaction costs.

On the flip side, most alternative investments are illiquid (meaning they’re harder to sell quickly) and often have longer investment horizons. Typically, they require higher minimum investments than traditional asset classes. And while the alternatives sector has seen vast improvements when it comes to transparency – with greater protection for investors – alternative investments are far less regulated than their traditional counterparts, often have complex structures and are generally associated with higher risks.

Traditional vs. alternative investments: What’s the difference?

Whether you prioritise traditional or alternative investments, it’s likely that you want to boost your returns in a way that aligns with your risk profile. However, it’s important to be aware of the differences between investment types. We’ve summarised them below:

  • Liquidity – Publicly traded stocks and bonds are easy to convert to cash, but alternative investments tend to be less liquid. What’s more, the unique nature of some alternative investments makes them difficult to value.
  • Regulation – From the Financial Conduct Authority (FCA) in the UK to the US Securities and Exchange Commission (SEC), the traditional investment market is heavily regulated. The regulation of alternative investments is less clear. Alternative investment vehicles are regulated by the SEC, for example, but securities aren’t required to be registered.
  • Returns – A significant advantage of alternative investments is their potential to deliver higher returns than traditional ones. Of course, in some instances, this is accompanied by complex investment structures and potentially a higher degree of risk.
  • Risk –  On the one hand, alternative investments are generally seen as riskier than those within conventional asset classes, making due diligence crucial when choosing an alternative investment product. However, given that they’re uncorrelated to traditional markets, alternative investing strategies help to diversify your portfolio and hedge against inflation. As a result, they have the potential to reduce overall portfolio risk. (Discover the Hays Mews Capital approach to due diligence and steps we take to ensure that the alternative investments we source have robust security structures that protect investor capital.)
  • Time horizon – Traditional investments have no set time horizon, meaning you can cash them in when it suits you. In contrast, many alternative investments tend to have longer time frames for a variety of reasons – you could be signing a contract to partner in a private equity business, for example, or waiting for property to accrue value. As a result, they’re often suited to those with longer time horizons. However, there are alternative investment opportunities with shorter time horizons. At Hays Mews Capital, for example, we focus on products with a fixed term of between 1 and 2 years – and those that offer regular interest payments.
  • Flexibility – From property to cryptocurrency, there’s a huge variety of alternative investments to choose from – and the way that investments are structured varies widely. As a result, there’s greater flexibility and scope to find investments that align with your goals, risk profile and personal interests.
  • Minimum investment – Traditional investment classes don’t have a minimum investment amount. Many alternative investments do. (We source alternative products with a minimum investment of $10,000, for example.) This is one reason that alternative investment strategies were traditionally limited to institutional and HNW investors.
  • Transactions costs – Due to low turnover, alternative investments typically have lower costs than traditional ones.
Traditional investmentsAlternative investmentsAlternative investments at HMC
LiquidityEasy to convert to cashGenerally illiquidRegular interest (coupon) payments
RegulationHighly regulatedLess regulationHigh levels of protection incorporated into structure of products
ReturnsDependent on market fluctuationsNon-correlated with the potential for higher returnsNon-correlated and predefined
RiskBased on your risk profileAlso risk-profile based, but investments often have complex structuresRobust security structures including debenture loans, security trustees, insurance and director guarantees
Time horizonNo set timeframeTypically longer time horizonsSet timeframe of 1 to 2 years
FlexibilityLess scope to choose an investment that matches interestsGreater choice – across asset class, structure, risk profile and moreChoice of asset classes – including luxury property, commercial real estate, litigation funding and arbitrage trading
Minimum investmentLow minimum amountHigh minimum investmentMinimum investment of $10,000
Transaction costsDepends on your investment choice but can be highTend to be lower due to low turnoverNo transaction fees
Annual chargesRange between 0.5 – 1.5% per annumDependent on investment typeNone

What role do alternative investments have in a portfolio?

As they behave differently to traditional investments, alternative investments have a distinct place in investor portfolios. The right alternative investment strategy enables you to diversify your portfolio and reduce overall risk – while helping you achieve your long-term financial growth objectives.

From capital growth to income generation, diversification and safety, different alternative asset classes perform different roles – so your allocation will depend on your financial goals, circumstances, and risk profile, as well as current market conditions.

Property investments provide a hedge against inflation, for example – as well as having the potential to generate a stable income and provide long-term growth. Meanwhile, commodities are widely held to be a safety net in turbulent markets – while investments in private equity boost returns. Alternative fixed-income bonds with a short-term horizon (such as those that we source) provide steady returns to give longer-term investments the opportunity to outlast market turbulence.

Of course, it’s crucial to do your research and conduct due diligence before you invest. However, the scope of the alternative investments market means there’s a wealth of choice if you’re looking for strategies to diversify and stabilise your portfolios – particularly if you have a longer time horizon to achieve your investment goals.

Alternative Investments portflio

Are alternative investments right for you?

Alternative investments are growing in popularity amongst retail investors, who are responsible for driving growth in the market. Alternative opportunities are now more accessible, with many products – including those we source – specifically aimed at retail investors. Meanwhile, institutional and accredited investors continue to allocate a greater proportion of their portfolios to alternatives.

The preference for alternative investments increases with wealth – with research from EY highlighting that 14% of the mass affluent, 29% of HNW individuals and 81% of UHNW investors include alternative assets in their portfolio. Bear in mind too that wealthier investors are likely to allocate a higher proportion of their portfolio to alternative investments.

Recent research also suggests that Generation X and Millennial investors are more likely than Boomers to express interest in differentiated alternative investment strategies – those that encompass cryptocurrencies, private assets and hedge funds, for example.

How can Hays Mews Capital help?

Ultimately, the right alternative investments have the power to bring stability, diversity and growth to your portfolio – unaffected by fluctuations in the market and high inflation. However, before diving in, it’s crucial to understand the time horizons, risk factors and market trends of the products in which you’re investing – and ensure they’re aligned with your financial goals and appetite for risk.

And that’s where we come in. We source best-in-class alternative investments across asset classes from luxury and commercial property to natural resources: primarily fixed-income bonds that combine high yields with short timeframes (in contrast to many alternative investments) and robust security structures. Leveraging a rigorous screening process, we seek out alternative investments that outperform others – and match them to you based on your financial circumstances and goals.

To uncover the returns you could earn with a fixed-income bond sourced by us, check out our investment calculator.

Frequently asked questions (FAQs) about alternative investments

What are examples of alternative investments?

Alternative investments are those that fall outside the traditional asset classes of stocks, bonds and cash. The term encompasses a broad range of investments – from private equity and hedge funds to natural resources and art.

Are alternative investments high risk?

Alternative investments are generally considered to be riskier than conventional investments, though they also offer the potential for higher returns. Asset types and investment products have their own unique risk profiles, making research and due diligence crucial aspects of the decision-making process.

What are the fastest growing alternative investments?

Fast-growing alternative asset classes include venture capital and digital assets – as well as private debt, infrastructure and hedge funds.

Are stocks an alternative investment?

Stocks are a traditional investment. When you buy stocks, you’re buying a share in a company that’s publicly listed on the stock exchange. Alternative investments are those outside the conventional asset classes of stocks, bonds and shares.

What is the most popular alternative investment?

While real estate is the best-known alternative asset class, popular alternative investments include art (and other collectables) as well as hedge funds, private equity and commodities.

What is alternative investment management?

Alternative investment management generally refers to the management of non-traditional assets such as commodities, private equity and real estate. It also encompasses alternative investment strategies – going short or using derivatives, for example – to invest in the traditional assets of stocks, bonds and cash.

Is a REIT an alternative investment?

Yes! A real estate investment trust (REIT) focuses on generating income through property. While investors don’t directly own or manage properties, investing in REITs gives them access to a regular income stream.

Joel Colman
Joel Colman

Joel Colman

Co-Founder Director

To uncover the returns you could earn with a fixed-income bond sourced by us, check out our investment calculator. And to book a no-obligations chat with me, just click here to access my diary.

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