what is an alternative investment 
an alternative investment is a financial asset that does not fall into one of the conventional investment categories conventional categories include stocks bonds and cash alternative investments can include private equity or venture capital hedge funds managed futures art and antiques commodities and derivatives contracts real estate is also often classified as an alternative investment investopedia nono floresunderstanding alternative investmentsmost alternative investment assets are held by institutional investors or accredited high net worth individuals because of their complex nature lack of regulation and degree of risk many alternative investments have high minimum investments and fee structures especially when compared to mutual funds and exchange traded funds etfs these investments also have less opportunity to publish verifiable performance data and advertise to potential investors although alternative assets may have high initial minimums and upfront investment fees transaction costs are typically lower than those of conventional assets due to lower levels of turnover most alternative assets are fairly illiquid especially compared to their conventional counterparts for example investors are likely to find it considerably more difficult to sell an 80 year old bottle of wine compared to 1 000 shares of apple inc due to a limited number of buyers investors may have difficulty even valuing alternative investments since the assets and transactions involving them are often rare for example a seller of a 1933 saint gaudens double eagle 20 gold coin may have difficulty determining its value as there are only 11 known to exist and only one can be legally owned 12types of alternative investmentsreal estate as an investment includes investing in physical properties or property based securities it can also include investing in real estate crowdfunding platforms real estate investment trusts reits and real estate mutual funds in addition to capital appreciation of tangible assets investors strive for operating income to potentially provide ongoing stable cash flow commodities are raw materials such as gold silver oil or agricultural products investors can invest in these tangible goods that have real world uses and often perpetual demand due to the underlying characteristics of what they are for example gold s price is arguably more stable because it is used in a variety of industries and is considered a store of value a blend of real estate and commodities investors can turn to farmland as an alternative investment in addition to reaping the benefits of physical tangible land farm owners may also receive ongoing cash proceeds should operations and sales of commodities yield positive results some investments may double as a hobby with art sports memorabilia entertainment memorabilia high end watches or other collectibles acting as alternative investments these items may have historical worth or develop worth over time as related parties i e the artist the associated movie star or the associated athlete become more historic the emerging form of digital currency cryptocurrency is seen as an alternative investment as it is outside the traditional scope of stocks and bonds though some may claim cryptocurrency does not offer a strong hedge against other risk on investments it may provide capital appreciation or passive income due to staking rewards blurring the lines of an alternative investment venture capital or private equity is simply a refined branch of stock investments instead of trading shares of public companies in an open market investors may seek alternative avenues to put capital into private companies or start ups investing in peer to peer lending translates to making loans to individuals or businesses through online platforms that connect borrowers with investors peer to peer lending takes a very similar form to investing in bonds though it is done on more private markets and often entails transacting with riskier clients there is a potential for higher returns though not always the term alternative investment simply refers to an investment being alternative to stocks bonds and cash both an unboxed star wars figurine with appreciating value and a rundown local warehouse may fall into the definition of an alternative investment regulation of alternative investmentseven when they don t involve unique items like coins or art alternative investments are prone to investment scams and fraud due to the lack of regulations alternative investments are often subject to a less clear legal structure than conventional investments they do fall under the purview of the dodd frank wall street reform and consumer protection act and their practices are subject to examination by the u s securities and exchange commission sec 3however they usually don t have to register with the sec as such they are not overseen or regulated by the sec as are mutual funds and etfs 4so investors must conduct extensive due diligence when considering alternative investments in some cases only accredited investors may invest in alternative offerings accredited investors are those with a net worth exceeding 1 million not counting their primary residence or with an annual income of at least 200 000 or 300 000 combined with a spousal income in each of the two previous years financial professionals who hold finra series 7 65 or 82 licenses may also qualify as accredited investors 5advantages and disadvantages of alternative investmentsbecause of their unique nature and differences from traditional markets alternative investments may have low correlations to traditional investments such as stocks and bonds therefore investors most often turn to alternatives to potentially help diversify an investment portfolio and reduce overall portfolio risk since alternatives are considered riskier investments they often have the potential for higher returns compared to traditional investments in addition alternative investments come in different forms and structures giving investors the flexibility to choose the investment that best suits their preferences risk appetite and investment goals for instance investors may favor certain cryptocurrencies based on passive income opportunities alternative investments may provide access to markets that are not available through traditional investments not only may investors find this more interesting i e a baseball enthusiast may attach more passion to buying an autographed baseball but that investor may find it more difficult to sell that collectible because there are likely to be fewer buyers making the market less liquid this may be perceived as a benefit as this may enhance the price stability amongst investors as there is less of an opportunity to panic sell transacting quickly based on emotion because of their limited accessibility alternative investments often have higher fees and expenses compared to traditional investments for example private equity and hedge funds typically charge high management and performance fees which can significantly reduce investors returns whereas many brokers offer free trades of a number of stocks and bonds many alternative investment products come at a cost 6as mentioned earlier alternative investments are often illiquid which may be a benefit however consider the situation where an investor needs to quickly sell a rare piece of movie memorabilia because they need the cash because there may not be an active or large market they may not be able to easily or quickly sell the item without incurring significant transaction costs or loss of value because alternative investments may not be commonly publicly traded it may be more difficult to obtain market data on historical trends or pricing whereas public companies must comply with many reporting rules some alternative investments may be subject to less regulatory oversight and have a higher risk of fraud misconduct and other abuses also mentioned above alternative investments tend to carry higher returns though this is a function of being riskier investments alternative investments are also more often complex some may have complex structures and terms that can be difficult for investors to understand increasing the risk of making uninformed or inappropriate investment decisions others may have no readily available market prices making it difficult to determine their true value may offer diversification benefitsoften have higher return potential than traditional investmentsmay offer protection against inflationmay offer investors more specialty investment optionsmay be less liquid and more difficult to sell in a hurryoften associated with higher fees and transaction costsoften have higher risk than traditional investmentsoften lacks transparency and may have reduced regulationmay not be right for novice investors due to their complexitymay be illiquid