About Alternatives

An alternative investment is a financial asset that does not fall into one of the conventional investment categories, which include stocks, bonds, and cash. Most alternative investment assets are held by institutional investors or high-net-worth individuals because of their complex nature and degree of risk.

The term “alternative investments” is a relatively loose one and includes tangible assets such as direct holdings of real estate, precious metals, diamonds, art wine, antiques, classic cars, coins, forestry, shipping or stamps and some financial assets such as indirect holdings of real estate, commodities, private equity, distressed securities, infrastructure funds, hedge funds, Exchange-traded funds, carbon credits, venture capital, film production, financial derivatives, and cryptocurrencies.

Characteristics of alternative investments include:
  • Low correlation with traditional financial investments such as stocks and bonds;
  • No “just-in-time” market values available since assets are often traded over-the-counter in private markets and not in public auction markets;
  • Alternative investments may be relatively illiquid;
  • Costs of purchase and sale may be relatively high;
  • There may be limited historical risk and return data;
  • A high degree of investment analysis may be required before buying;
  • Higher dispersion of returns among investors;
  • Markets often not as efficient, which in turn can offer up more opportunities to exploit;
  • Less regulation (such as crypto-currencies);
  • Lower transparency;
  • Unconventional legal and tax implications.
US$ 10 trillion by the end of 2020

With so many potential advantages to holding alternatives, therefore, it is not surprising that investors are becoming increasingly drawn to the sector. Recent estimates point to alternative investments reaching a record high of US$ 10 trillion by the end of 2020, according to Preqin estimates.

But while alternative investments may offer distinct advantages to an investor, it is worth noting that they don’t guarantee them.

Typical measures of risk and return (such as beta, mean return and standard deviation) may not provide a sufficient assessment of an alternative investment’s risk-and-return characteristics or indeed may even be wholly unreliable or inappropriate.

Ultimately, alternative investments can offer investors a much-welcomed source of higher returns and risk diversification that are simply non-existent in the world of traditional investing.