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Alternative Investments: The Complete Guide

It’s no secret that portfolio diversification is one of the most important and effective methods of risk management for investors. That sentiment has never rung more truly—or held such importance—with potential recession warning signs on the horizon. 

Impending recession or not (we’ll address that shortly), one often used strategy for risk management and portfolio diversification is alternative investments. In this article, we’re going to explore the relationship between a potential recession and alternative investments, answering questions like:

  • Is a recession coming?
  • What does recession-proof investing look like?
  • What do some consider to be the best alternative investments?
  • What are the possible advantages to alternative investments?

Before we get into things like alternative asset classes and investing strategies, we must address the elephant in the room:

Is a Recession Actually Coming?

The proverbial “million-dollar question” is a deceptively simple-seeming one: is a recession really coming? While that may seem like a simple “yes” or “no”, the reality is far more complex. With that in mind, consider these perspectives from some of the media reporting over the past 12 months alone:

  • November 2022: The Economist published an article boldly titled, “Why a Global Recession Is Inevitable in 2023.” This article explores how “the world is reeling from shocks in geopolitics, energy, and economics” and what effect(s) it has had among investors. It paints a relatively dire picture, but suggests in no uncertain terms that a recession is, in fact, likely coming.
  • January 2023: An NPR article offered a similar—though decidedly less urgent or definitive—perspective, observing how, “Whether in the supermarket aisle, or the corporate suite, a lot of people are expecting a recession—even if there’s no certainty there will be one at all.” The article further described how “no two recessions are alike” conceding that a recession could be “blip-ish,” or “more like [an] economic tsunami.” Ultimately, the writer concedes, “Many analysts expect a relatively mild and short recession” if one does indeed occur.
  • February 2023: An AP News article, “2023 US Recession Now Expected to Start Later than Predicted,” offered an optimistic view, citing the nation’s “surprisingly resilient economy.” The article served to move the goalposts, in effect, pointing to how “a third of the economists who responded to the survey now expect a recession to begin in the April-June quarter,” while “one-fifth think it will start in the July-September quarter.”
  • March 2023: A Fortune article predicted an “inevitable” recession, citing factors like how “years of virtually zero interest rates ignited stock markets, bond markets, and housing bubbles” and “inflation increasing at the fastest pace in more than 40 years.”
  • May 2023: A Forbes article, “Is The U.S. Economy Heading For A Recession?” again addressed recession rumors going back to mid-2022, suggesting that “a recession could be imminent.” The article offered a more precise forecast than other sources, suggesting “there is a 68.2% chance of a U.S. recession
  • June 2023: A piece published by USA Today asked the question “Recession or no Recession?” within its title, and quickly set its focus on a bold prediction, stating “Deutsche Bank sees a 100% probability the U.S. will have one.”
  • June 2023: CNBC published a report suggesting an inevitable recession. Not simply a domestic concern, CNBC also stated that Europe is likely to see its own recession in 2024.
  • July 2023: The New York Times published a story with the intriguing title, “Could the Recession in the Distance be Just a Mirage?” The article noted how after at least a year of dire predictions, “the recession is nowhere to be found” and “inflation has slowed significantly, and looks set to keep cooling.” As the article would ultimately concede, though, “there is still plenty that could go wrong,” meaning investors shouldn’t simply assume the recession rumors were overblown.
  • July 2023: U.S. Bank’s article, “Is the U.S. Economy at Risk of a Recession?” revived the key question, primarily focusing on “the re-emergence of inflation.” To further its argument, the article cited a U.S. Bank economist who notes that while “it seems likely the economy may avoid a recession,” we’re not completely out of the proverbial woods.

So, what is the big takeaway here, other than potential whiplash? Is a recession, in fact, imminent—or have rumors of a recession been greatly exaggerated? 

Unfortunately, “perhaps” may be the most reasonable—though not necessarily helpful—answer here. 

As you can probably deduce from the lack of consensus, it’s important to monitor the markets, pay attention to the economy, and attempt to mitigate risk through portfolio diversification. That way, if and when a recession does occur—whether it comes in a month, a year, or 15 years down the road—you can prepare and potentially avoid your own economic catastrophe. 

What Are Alternative Investments, and Why Are They Important?

One of the most important ways to diversify your investment portfolio is to consider investment strategies that are less correlated with traditional assets, like alternative investments. It’s no wonder, then, that alternative investments are growing in popularity. To what extent, though? Recent NASDAQ projections suggest that “by 2025, total alternative investments under management are projected to reach $17.2 trillion—a four-fold increase since 2010.”

What Is Classified as an Alternative Investment, Exactly?

An alternative investment is a type of investment that doesn’t neatly fit within any conventional investment categories. Or, as Investopedia notes, “An alternative investment is a financial asset that does not fit into the conventional equity/income/cash categories. Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.”

To better clarify the difference between traditional and alternative investments, consider how BlackRock differentiates them:

  • Traditional investments refer to “strategies that invest directly in public stocks, bonds, and cash in order to make a return.”
  • Alternative investments, by contrast, “aim to exploit inefficiencies in public markets or investments in private, less-liquid assets.”

To better understand this distinction, we can explore the most common examples of each investment type:

  • Traditional investments examples include three major asset classes: stocks, bonds, and cash, as well as traditional mutual funds.
  • Alternative investments examples include private equity, private debt, hedge funds, real estate, commodities, and alternative investment funds (also known as “alt funds”).

What Are the Possible Advantages of Alternative Investments?

Alternative investments can offer several unique advantages, especially as part of a diverse investment portfolio. And while there are several different types of investment alternatives worth considering, they do share a few key benefits. Here are five of the most commonly-cited:

  1. The potential for higher returns than you might see with a portfolio made up of traditional assets only.
  2. Reduced correlation with traditional assets (such as stocks and bonds).
  3. Risk management and hedging capabilities, which may lead to steadier returns than traditional investments.
  4. The availability of unique alternative asset classes that provide compelling opportunities for diversification.
  5. The potential for certain assets to possibly maintain or grow their capital value during significant periods of market downturn, depending on the type of asset.

For high-net-worth (HNW) individuals, these advantages can be especially appealing. As a recent report produced by Cerulli notes, the two key reasons why HNW individuals are becoming increasingly open-minded toward various alternative investments are “portfolio diversification to help reduce volatility” and “new growth opportunities.”

It’s important to note that alternative investments, like all investments, carry some degree of risk. Alternative investments, similar to stocks, bonds, mutual funds, and exchange-traded funds, can lose value—even their entire value—if market conditions sour. You should carefully consider the risks of any investment prior to investing.

What Are the 2 Main Categories of Alternative Investments?

One of the most straightforward ways to categorize alternative investments involves two distinct categories: assets and strategies.

  • Alternative assets: Alternative assets are generally referred to as those assets that are not traded on public markets, unlike traditional assets such as stocks and bonds. The most common alternative assets examples include private equity, real estate, and infrastructure, while some lesser-known or emerging alternative asset types include:
    • Artwork
    • Commodities, such as gold or oil
    • Cryptocurrencies, such as Bitcoin
    • Managed Futures
    • Venture capital investment
  • Alternative strategies: When traditional investments like stocks and bonds are managed through non-traditional avenues—such as hedge funds—they are considered alternative investment strategies. As noted by the Chartered Financial Analyst (CFA) Institute, investors gravitate toward these options for many reasons including the following seven (quoted, but broken into bullets for readability):
    • Lower legal and regulatory constraints
    • Flexible mandates permitting use of shorting and derivatives
    • A larger investment universe on which to focus
    • Aggressive investment styles that allow concentrated positions in securities offering exposure to credit, volatility, and liquidity risk premiums
    • Relatively liberal use of leverage
    • Liquidity constraints that include lock-ups and liquidity gates
    • Relatively high fee structures involving management and incentive fees

Alternative Investments vs Traditional Investments: What Are the Key Differences?

There are several differences between traditional and alternative investments, related to aspects such as liquidity, shareholder profile, risks, and potential returns, among others. 

  • Liquidity | While traditional investments have a high liquidity profile, alternative investments face potential illiquidity—meaning investors may be unable to trade the alternative investments and will hold the alternative investment for an unspecified period of time.
  • Trading | Traditional investments are traded within public markets, while alternative investments are available within private as well as publicly traded markets.
  • Valuation | The value of traditional investments is typically readily ascertainable, while the value of alternative investments may not be. Additionally, the value of some alternative assets are vulnerable to subjectivity. 
  • Shareholders | Passive investors make up traditional investments’ shareholder base; with alternative investments, shareholders may take on a more active role (potentially even owning the company).
  • Transparency and Regulation | While traditional assets are heavily regulated, alternative investments are not typically viewed with the same amount of scrutiny as traditional investments. 
  • Performance and Returns | With traditional investments, global market movements can significantly impact returns. Potential returns on alternative investments are not as correlated with traditional investments and may react differently to global market movements and conditions.

What Are 8 Alternative Investments? (Examples)

The phrase “alternative investments” often applies to a wide variety of assets and strategies. That makes it important to understand what options are available, the potential advantages of each, and which opportunities may represent the best alternative investments at a given point in time for your needs. You should contact your financial advisor and/or an expert in alternative investments to help determine which, if any, are suitable to meet your needs. 

To help you understand the landscape, let’s take a look at a few of the alternative investment options. For starters, Harvard Business School (HBS) has identified “7 Types of Alternative Investments Everyone Should Know,” a list which includes:

  1. Private Equity: You might invest in one or more private companies, or companies that simply aren’t listed on the New York Stock Exchange or another public exchange. The most common categories or subsets of private equity include venture capital, growth capital, and company buyouts.
  1. Private Debt: Investing in private debt, an increasingly popular alternative investing asset, may offer benefits like resiliency, diversification, and opportunity for improved returns.
  1. Hedge Funds: By investing with privately-managed hedge funds (rather than—or in addition to—traditional mutual funds), investors can take on a calculated risk with potential commensurate with that risk. Hedge funds are typically managed in a more aggressive manner in order to achieve these goals. The reality is that hedge funds actually aim to “help protect investors from market volatility and downturns better than other investment benchmarks” and “deliver reliable returns over time,” according to the Managed Funds Association
  1. Real Estate: Real estate, often considered one of the most popular and fastest-growing alternative investments, presents a wide range of potential advantages. Like the other items within this list, it can be a great option for portfolio diversification (which aims to mitigate risk) as well as revenue generation, passive income potential, and tax benefits. As laid out within an Entrepreneur article, investing in real estate also offers “massive potential for appreciation” and “inflation hedge.” An investment in real estate also constitutes a tangible investment, which, for many investors, means diminished anxiety (in contrast with stock market investments, for example).
  1. Commodities: Crude oil futures, corn futures, natural gas, soybeans, and gold rank among the most popular commodities for modern investors to consider. To enter the commodities market, you can either buy physical assets outright, or invest “through commodity trading platforms, exchange-traded funds (ETFs), or mutual funds.” In addition to portfolio diversification, Investopedia notes several benefits to commodities trading, including a hedge against inflation and the potential for excellent returns.
  1. Collectibles: Investing in collectibles is a relatively straightforward concept, especially when compared with some of the other, more nuanced items in this list: you purchase items or assets with the intent of letting them appreciate in value over time. Fine art, vintage cars, stamps, coins…there are plenty of collectibles that may be worth investing in. Many collectible investors find the most satisfaction and best opportunity for success when investing in collectibles they are interested in and familiar. This is because they better understand the value of the collectibles, the factors impacting that value, and so on.
  1. Structured Products: A relatively new alternative investment type, structured products’ returns are based on how an asset performs. As noted by HBS, they “usually involve fixed income markets,” which “pay investors dividend payments like government or corporate bonds” as well as “derivatives, or securities whose value comes from an underlying asset or group of assets like stocks, bonds, or market indices.”
  1. Life Settlements: An eighth alternative investment, not identified by the Harvard Business School’s article on alternative investments, is life settlements. When a person no longer wants or needs a life insurance policy, they often work with a life settlement broker to sell their policy to an investor. For the policyholder, life settlements can represent a way to get a one-time payout in exchange for their policy. The investor who purchases the policy takes over paying the premiums, and then ultimately collects the policy’s death benefit. Unlike the other items in this list, life settlements aim to provide a predictable return on the investment, since it’s tied to the policy’s death benefit. Life settlements can be a great way to diversify a portfolio (for those who qualify). Life settlement investments are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional who is well versed in this field to determine if life settlements are a viable option for you. 

Alternative Investments: Additional Questions (and Answers)

What Is the Most Popular Alternative Investment?

Many sources—such as The College Investor and YieldStreet—list real estate as the most popular investment. It’s certainly among the most well-known and understood. The reason for its popularity is simple: as noted by Seeking Alpha, real estate “has historically been a source of growth and income, diversification, and a hedge against inflation.” In addition to investing in direct, tangible assets (properties), many investors also consider investing in real estate through publicly-traded REIT stocks.

  • What Is a REIT, and Is a REIT an Alternative Investment? Most discussions about real estate investing will at least broach the topic of real estate investment trusts—REITs, for short. As an alternative investment, “REIT” simply refers to a company that either owns, operates, or provides financing for income-generating real estate properties. Within a REIT, investors’ capital is pooled, enabling individual investors to “earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves,” as Investopedia notes.

Not interested in real estate? There are plenty of other alternative investments that have grown in popularity over the years. Pensions & Investments, for example, only ranks real estate as the third most popular alternative investment. Here’s their list, with each investment type’s percentage of survey respondents that have invested in each:

  1. Credit (78.4%)
  2. Private Equity (74.3%)
  3. Real Estate (67.6%)
  4. Hedge Funds (39.2%)
  5. Infrastructure (37.8%)
  6. Cryptocurrency (8.1%)

What Are the Fastest Growing Alternative Investments?

Overall, investor interest in alternative investments has seen consistent growth over the past 20 or so years, with that growth expected to continue. According to the Chartered Alternative Investment Analyst (CAIA) Association, alternative investments only accounted for 6% of the Global Investable Market in 2004. By 2018, that percentage had jumped to 12%, and by 2025 it’s expected to reach anywhere from 18-24% of the global market. 

What are the fastest growing alternative types, though? Forbes lists the following in their list of the alternative investment sectors seeing the biggest growth right now:

  1. Merchant Debt/Factoring, a specific type of business loan that provides financing for “established companies that have a track record of cash flow and financial performance.”
  2. Private Equity Healthcare Investments, which include a wide range of timely and even emerging possibilities, “from telemedicine to biotechnology to cannabis.”
  3. Artificial Intelligence, which is becoming increasingly versatile for an ever-growing list of applications across virtually every modern industry in America.

What Alternative Investment(s) Have Historically Provided the Most Consistent Rates of Return?

Assessing different investments’ potential risks can be a pretty complex undertaking, since there are so many factors and variables involved. That’s why it’s so important to talk to your financial advisor about ways to diversify your portfolio as a risk management strategy. 

One of the most difficult things to predict with alternative assets is how market conditions—including world events—may impact their value. Certain asset classes, however, like real estate investments and collectibles, have shown more consistent rates of return over the years than other classes, according to a National Bureau of Economic Research (NBER) study.

How Can I Learn More About Alternative Investments?

To learn more about alternative investments and how you can leverage them as a part of your portfolio, there are a couple different avenues worth considering.

1. Consider Taking an Alternative Investments Course

There are several convenient online options available that can teach you more about alternative investments. Here are a few examples:

  • Harvard Business School offers an online, self-paced Alternative Investments course, as part of its larger Finance & Accounting track. If you can spend 6-7 hours per week, the course will take around 5 weeks. It does cost $1,750, but can earn you a Certificate of Completion for your work.
  • You might also consider BlackRock’s online Alternative Investments course, centered around a 5-step framework to become an “alternatives guru.” The best part? It’s free.
  • The CAIA Association has an online Fundamentals of Alternative Investments course that’s self-paced, takes around 20 hours, and can earn you an online certificate (for $995). 
  • Udemy’s 5-in-1 Alternative Assets Masterclass includes 16 hours of on-demand videos, mobile access, and downloadable resources, as well as a certificate of completion. You will need a Udemy account, though, which starts at $16.58 per month. 

2. Read More In-Depth Articles

Throughout this article, we’ve cited a wide range of professional sources and included hyperlinks so you can easily access any you wish to take a deeper dive into. Here are some of the highlights:

Is a Recession Coming?

  • Why a Global Recession Is Inevitable in 2023 [The Economist]  
  • A Recession Might Be Coming. Here’s What It Could Look Like [NPR
  • 2023 US Recession Now Expected to Start Later than Predicted [AP News
  • A Recession in 2023 Is Now Inevitable. Layoffs in Tech and Finance Will Spread to Other Sectors [Fortune
  • Is The U.S. Economy Heading For A Recession? [Forbes
  • Recession or No Recession? Why Deutsche Bank Says an Economic Downturn Is 100% Inevitable [USA Today
  • A US Recession Is Coming This Year, HSBC Asset Management Warns—with Europe to Follow in 2024 [CNBC
  • Could the Recession in the Distance Be Just a Mirage? [New York Times]
  • Is the U.S. Economy at Risk of a Recession? [U.S. Bank

On Alternative Investments

3. Speak to Your Financial Advisor

Consulting with a trusted financial advisor or an expert in a specific alternative investment field is a great way to understand the investment landscape, market conditions, alternative investment management strategies, and other essential considerations. One such alternative investment that is gaining popularity is life settlements. If this type of investment piques your interest, i2 Advisors are the experts to contact. Reach out to i2 Advisors today for comprehensive advice on this unique asset class within the realm of alternative investments.