Alternative investments include all investments other than stocks, bonds and saved cash. Individuals have long used alternative investments to ensure their financial security. Large institutional funds increasingly make alternative investments as well, for the same reason. Investors can hire a financial advisor to invest their money in alternative investments in exchange for 1 to 2 percent of the money they earn, or make investments themselves.
Types of Alternative Investments
Common types of alternative investments include hedge funds, real estate, loans, commodities and derivatives. A hedge fund is a private partnership of investors who must contribute a substantial amount of money to the fund in exchange for a high return. Commodities include items that will likely appreciate in value over time, such as precious metals, gemstones and fine art. Real estate investments may involve purchasing property and renting or selling it, or investing in a real estate investment trust (REIT). Emerging markets, such as alternative energy forms, are also alternative investments. So are community development investments and private loans to individuals or businesses. Derivatives are contracts to buy or sell something at a certain price at a later date.
Institutions such as insurance companies, banks and pension funds often invest in alternative investments, too. Pay close attention to what they invest in, advises Stephen Todd Walker in "Wave Theory for Alternative Investments." These institutions hire excellent money managers to invest their finances. However, don't blindly follow their lead. If they begin to invest in a commodity, it might be a good time to invest. If you wait until numerous institutions are investing in that commodity, though, prices will be high and you probably wouldn't profit much from investing.
Diversifying your portfolio through a variety of standard and alternative investments ensures you won't lose too much on one investment. Furthermore, different types of investments respond differently to the same market conditions. Real estate investment trusts (REIT) protect you from unpredicted inflation, for instance, as rents simply rise when inflation occur. Some alternatives like real estate, commodities and loans provide direct involvement with your investments, which improves their chances of success.
Alternative investments often require a high financial investment, however. Individual investors typically find commodities one of the more accessible alternative securities, as they don't necessarily require a high investment. Alternative investments frequently don't provide as much data as standard investments to track their performance over time, too. Investors typically have less exposure to alternative investments than to typical investments like mutual funds. They might be drawn to alternatives so they can make their own choices, despite not being fully equipped to do so in a savvy manner.
- Investopedia: Alternative Investments
- "Wave Theory with Alternative Investments"; Stephen Todd Walker; 2011
- "How to Make Money in Alternative Investments"; Hubert Bromma and Lisa Moren Bromma; 2009
- "Barron's Finance and Investment Handbook"; John Downes and Jordan Elliot Goodman; 2003
- Investopedia: Hedge Fund
- "Retire Right"; B. Cameron; 2004
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