Alternative Investments: A Comprehensive Guide to Tangible & Financial Assets

An alternative investment is an investment in assets different from cash, stocks, and bonds. Alternative investments can be investments in tangible assetsTangible AssetsTangible assets are assets with a physical form and that hold value. Examples include property, plant, and equipment. Tangible assets are such as precious metals or wine. In addition, they can be investments in financial assets such as private equity, distressed securities, and hedge fundsHedge Fund StrategiesA hedge fund is an investment fund created by accredited individuals and institutional investors for the purpose of maximizing returns and.

Generally, alternative investments tend to show a low correlation with traditional investments (stocks, bondsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period.). In addition, some alternative investments come with extremely complicated valuation and are highly illiquid. Due to such reasons, certain types of alternative investments are quite popular among financial institutions and high net worth individuals.

Alternative investments may be a great addition to an investor’s portfolio. Many alternative investments provide significantly greater returns relative to traditional investments. Also, the availability of a wide range of alternative investments makes them a viable option despite the investor’s risk tolerance or perceptions of the market.

Features of Alternative Investments

Almost all alternative investments come with the following features that distinguish them from traditional forms of investment:

1. Low correlation with the traditional investments

This may be extremely beneficial to potential investors because the low correlation provides opportunities for portfolio diversification.

2. Hard to determine the underlying value

Alternative investments are often inherently complicated when it comes to valuation. The valuation of an alternative investment may require specific knowledge, and some exotic investments, such as fine art, may show unpredictable demand patterns. In addition, they may be unique in their nature, which also complicates the valuation.

3. Relatively low liquidity

Generally, alternative investments possess relatively low liquidity, especially compared to traditional investments. The low liquidity can be explained by the absence of centralized markets and the low demand for some of the assets relative to traditional investments (think about works of contemporary art). In addition, some of the investments come with restrictions regarding exiting from the investment.

4. High purchasing costs

Alternative investments are frequently associated with high purchasing costs. Some alternative investments such as hedge funds require a minimum investment amount, as well as a fee.

Classification of Alternative Investments

Alternative investments may be classified as tangible or intangible investments.

Tangible alternative investments include the following:

• Precious metals
• Fine art
• Wine
• Stamps
• Antiques

Examples of intangible alternative investments include:

• Hedge funds
• Private equity
• Venture capital
• Derivatives
• CryptocurrencyCryptocurrencyCryptocurrency is a form of digital currency that is based on blockchain networking. Cryptocurrency like Bitcoin and Ethereum are becoming widely accepted.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Investing: A Beginner’s GuideInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading
• Marketable SecuritiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion.
• Service ChargeService ChargeA service charge, also called a service fee, refers to a fee collected to pay for services that relate to a product or service that is being purchased.
• Types of AssetsTypes of AssetsCommon types of assets include current, non-current, physical, intangible, operating, and non-operating. Correctly identifying and