What Are Alternative Investments?

Jun 12, 2024

Alternative investments are becoming more and more popular, but what exactly are they, and what are the different types of alternative investments?

Alternative investments include a wide range of non-traditional investments that exceed stocks, bonds and cash instruments found in traditional investment portfolios. Alternative assets can range from tangible items such as art and real estate to intangible options such as:

Hedge funds
Pension funds
Cryptocurrencies
Venture capital

They ultimately exceed the boundaries associated with traditional asset classes. Read on to learn more about the world of alternative investments, including the key characteristics of alternative investments and their benefits.

The Key Characteristics of Alternative Investments

Alternative investments have certain characteristics that set them apart from traditional assets. They have their own advantages, challenges, and of course, investment strategies. First of all, alternative investments typically have a low correlation with traditional financial markets.

This means that their value may not move in correlation with stocks or bonds – which in turn, can help to reduce the overall risk. Alternative investments also have the potential for higher returns compared to traditional investments such as stocks and bonds.

That being said, this potential for higher returns comes with increased volatility and higher risk. Another key characteristic of alternative assets is their illiquidity. Generally, you can not convert these investments into profit quickly. Art, for example, is generally considered a medium to long-term investment.

Likewise, real estate can take a long time to prepare and sell, so you’ll need a long-term outlook for real estate investing. Ultimately, you’ll often need specialised knowledge and expertise to invest in alternative assets.

Whether you’re new to the investment scene or you’re simply expanding your portfolio, it’s always best to work with a professional (for example, a financial advisor).

You’ll need a deep understanding of the asset class to evaluate and determine the value of a piece of art, or the potential of cryptocurrency. Always conduct thorough research and due diligence beforehand. So, to summarise, some of the key characteristics of alternative investments include:

Low correlation with stocks and bonds
Potential for higher returns (and higher risk)
Illiquidity (you’ll often need a long-term outlook)

Exploring The Best Types of Alternative Investments

The world of alternative investments is very diverse - there are many alternative investment opportunities to choose from. Here are some of the most popular alternative investment opportunities, from real estate to art investment:

Real Estate

Real estate is one of the most popular forms of alternative investment. Residential, commercial and industrial real estate can be a great investment, providing rental income and potential appreciation over time. However, it is predicted that the average annual return on investment in the real estate sector will fall between 4.1 and 7.3 until 2025, with the highest average returns being 7.3%. Like all forms of investment, real estate involves careful selection and research. When investing in real estate, you have to consider factors such as:

Mortgage costs
Management
Market analysis

Commodities and Precious Metals

Investing in commodities and precious metals such as gold, silver, oil and other agricultural products can be a great hedge against inflation and currency fluctuations. Precious metals are known for holding their value and are often viewed as stores of value during times of economic uncertainty.

Precious metals can be a great way to diversify your portfolio too. The global precious metals market was valued at $306.44 billion in 2023. It is estimated to grow to $501.09 billion by 2032, with a compound annual growth rate (CAGR) of 5.6%. Gold tends to be the most common form of investment in this sector, but silver and platinum are also extremely popular too.

Like many forms of alternative investment, this type of investment can be volatile due to factors such as supply and demand. Commodities can also include agricultural products.

It’s all about investing in products with real-life applications, and they usually have a high demand. Commodities and precious metals can be a great store of value, making them a great investment choice.

Cryptocurrencies

Cryptocurrency investment has seen a huge rise in the last few years – digital currencies such as Bitcoin, Ethereum and Tether are popular alternative investment options. Investing in cryptocurrency offers the potential for significant returns – however, it can be a volatile investment, and there are regulatory uncertainties to consider.

Be sure to consider events that could impact the value of cryptocurrency - for example, the Bitcoin halving. Bitcoin has a limited supply - and around 93% had been mined by the end of 2023. This is why the Bitcoin network controls the supply by reducing the mining rewards every 4 years. The past halvings (in 2012, 2016 and 2020) increased the value of Bitcoin.

Collectables

Collectables can be a brilliant alternative investment. This type of investment can include a range of items such as:

Comic books
Toys
Stamps
Trading cards
Fine wines
Whisky
Jewellery
Coins

There are several factors that can impact the appreciation of a collectable item – for example, quality, rarity, storage conditions, quantity and many more. For example, a mass-produced stamp is less likely to increase in value over time than a limited-edition stamp.

It’s important to keep your collectable items in mint condition – this will help them maintain their value or increase in value over time.

Peer-to-Peer Lending

Peer-to-peer lending, also known as P2P, is a popular investment strategy. It’s when you lend money to businesses or individuals in return for regular interest payments, and of course, the full amount back.

It’s similar to investing in bonds - however, it is typically done on private markets and can involve dealing with riskier clients. This alternative investment has the potential for higher returns, but can also be risky.

Art

One of the best alternative investments is art. Art is tangible, something that you can enjoy, and it is generally unaffected by financial markets. Many high-net-worth individuals invest in art for a reason – because it’s a great alternative investment. Some ultra-high-net-worth art investors include the likes of:

Jeff Bezos
Bill Gates
Oprah Winfrey
Elton John

The art market tends to be resilient against economic uncertainty – take the Great Recession of 2007-2009, for example. The demand for art remained consistent and resisted the economic downturn of the time. At Grove Gallery, you can invest in art with just £3,000, and expect average returns of 8%-12% per year.

We understand that the art market can be difficult to navigate, which is why we are home to an expert team of art advisors. We can guide you through the process and help you to determine the best art to invest in for your art collection. Begin your art investment journey today with Grove Gallery.

The Benefits of Alternative Investments

Now you have an understanding of the characteristics of alternative investments and the different types of alternative investments, let’s explore some of the key benefits of this type of investment.

First of all, alternative investments can be a great way to diversify your portfolio. This, in turn, can reduce the overall risk exposure to traditional assets. In many cases, alternative investments can lead to higher returns.

For example, investing in blue-chip art may be a more lucrative avenue than investing in traditional stocks and bonds, depending on the economic climate at the time.

Alternative investments can also be a more exciting venture – investing in alternative options can provide more unconventional and unique opportunities. This means you can tap into emerging industries and trends!

Some alternative investments are tangible – they’re something you can enjoy without decreasing their value. Take art, for example – you can still view and admire the art you invest in without worrying about the value decreasing.

The same, however, doesn’t apply to other alternative investments such as cryptocurrency or mutual funds investment.

Ultimately, alternative investments have changed the investment scene, offering you a wide range of opportunities to explore that exceed the boundaries associated with traditional assets.

Whether you have a passion for art, an eye for real estate or you enjoy stocking up on collectables, alternative investment can be a lucrative and exciting venture. To summarise, here are some of the key benefits of alternative investments: