Many investors think of investments as stocks, bonds, cash, mutual funds and exchange-traded funds (ETFs). While these traditional assets are great for some people, others may prefer to diversify their portfolios with other financial instruments.
Alternative investments offer diversification from stocks and bonds, provide income potential, and boost returns. They may also be less volatile than other asset classes during uncertain markets.
Private equity is a type of alternative investment that can be useful to diversify a portfolio. It provides a higher rate of return than traditional asset classes, is less correlated to public markets and has a unique risk-return profile.
The majority of private equity funds are backed by large institutional investors such as pension funds, sovereign wealth funds, endowments and very wealthy individuals. Fund managers use both investors’ contributions and borrowed money to take a controlling stake in companies.
Funds often invest in companies in the early stages of their lifecycle. These include start-ups, pre-profit companies, and well-established firms that are in need of a restructuring. Eventually, private equity funds might sell these companies or take them public again in an initial public offering.
Venture capital is a form of financing that provides funding to small businesses and startups with potential for growth. It is typically provided by high net worth individuals or firms known as venture capitalists (VCs).
VC investments are made to early-stage startup companies with the expectation that they will experience rapid growth over time and earn large returns for their investors. VCs provide the business with capital in exchange for equity ownership, and many times will receive a share of profits as well.
VCs are similar to mutual fund managers in that they pool money from private investors, and then invest it on their behalf. They also provide guidance to the startup’s management and often charge a percentage of profits for their services. VCs typically exit their investment through secondary sale or an initial public offering.
Real estate is physical property that includes land and buildings. It can be used for residential, commercial, industrial, and special purpose purposes.
There are many types of real estate, including single-family homes, condos, cooperatives, townhouses, duplexes, multi-family apartments, high-value properties, vacation houses, and more. Each type of real estate is different from the next and may be subject to certain regulations and restrictions.
Typically, residential real estate is the most familiar asset class for investors and is comprised of single-family homes, condos, and other housing options. There are also commercial real estate assets, such as shopping centers, office buildings, hotels, and hospitals.
Oil & Gas
The oil and gas industry is critical to the global economy, generating an estimated $5 trillion in revenue. The sector has experienced a period of lows, but recent recovery has seen production and demand grow.
The energy market is driven by a complex set of regulations, which influence everything from the type of oil and gas produced to the price it sells for. Alternative forms of renewable energy, such as solar and wind power, are also growing in popularity, due to their cost-effectiveness.
Some investors are pulling back from fossil fuels, despite strong returns, citing concerns about climate change. Blackstone Group, for instance, has told prospective backers that its next buyout fund won’t make fossil-fuel investments.
Startup investing is a type of alternative investment where investors invest in startups and get a share of the company’s profits. These investments offer returns, tax benefits, and portfolio diversification.
There are many ways to invest in startups, including through online platforms and angel networks. But it is important to remember that investing in startups can be a very risky business.
VCs are professional funds that invest in early-stage businesses with big potential and scalability. They often expect to return their money within 3-5 years.
Investors can also invest in startups through convertible notes, which are essentially loans that accumulate interest over time until they’re converted into shares. These deals can be lucrative for both investors and startups, as they allow startups to pay off their debts and work on their business.