Understanding Alternative Assets: A Comprehensive Guide

Alternative assets are assets that are not traditionally included in an investment portfolio but in which investors can put money. This type of asset does not represent a claim on assets of a company, as in the case of a stock or a bond. Instead, it is an actual physical item, and it gains or loses value based on the fluctuations of value to that item. Here are a few things to consider about alternative assets.

Alternative Assets

Alternative assets could include many different types of investment options. For example, real estate and commodities are prime examples of alternative assets. Many people like to include these in their portfolio in addition to stocks and bonds. Some other examples of alternative assets are rare coins, stamps, artwork, sports cards and other types of collectibles. An investment in a collective scheme such as a mutual fund or a commodities trading pool can also be considered an alternative asset. With this type of investment, you do not actually have a claim on the company's assets. Instead, you have a claim on the securities that are included in the investment pool.

Diversification

One of the biggest advantages of investing in alternative assets is that doing so provides diversification to the investor. Many people get caught up in investing in the stock market and bonds and put large percentages of their portfolios into these types of investments. While they are generally solid investments, their markets can go through downturns just as can everything else. When this happens, you could potentially lose a large portion of your portfolio. If you invest in some alternative assets, your portfolio can more easily withstand downturns in the stock and bond markets.

Inflation Hedge

When you own physical assets, you will have a head against inflation. These assets will continue to grow in value in most cases even if the rest of the economy is not doing very well.

Liquidity

One of the hurdles that investors have to get over with alternative assets is the amount of liquidity. With most traditional forms of investment, you can easily buy and sell securities anytime that you want. With alternative assets, this may not be the case. Many of them have markets that are not liquid at all. For example, if you own collectibles, they could be worth an astounding sum of money. Even though they are worth a lot of money, you cannot get access to this money until you find a buyer that is willing to pay true value. In some cases, it can be very difficult to locate buyers that have the money and also the desire to make a purchase.

Barriers to Entry

Another potential problem with some of these investments is that they have barriers to entry. You may have to make a large financial investment in order to get involved. With the stock market, you could get involved in penny stocks and invest with very small amounts of money. This is not always the case with alternative assets.