Hedge funds, private capital, natural resources, real estate, and infrastructure offer unique benefits and reduce market risks.
Why should you consider investing a portion of your hard-earned money into alternative investments, or “alts,” especially in light of the volatile times we are now experiencing? To answer that question, let’s start with a definition:
Alternative investments are defined as “supplemental strategies to traditional long-only positions such as stocks, bonds, and cash.”
By nature, alts do not carry stock market risk, bond market risk, or cash risk (which erodes in value due to inflation). As far as industries are concerned, an investor can find alts in almost every sector of the economy. That includes, but is not limited to, healthcare, energy, technology, finance, food and beverage, and agriculture.
As to investment categories for alts, they are included primarily in these five:
We know about them. We have read about them, some good and some bad. But well-run hedge funds reward investors and can also protect you from market risks. The key things investors should look for in these funds are not only the type of hedges they provide, but their track record in both down and up markets. As their name implies, their goal is to “hedge” against risk while providing a potential out-sized return over time in non-traditional investments.
Investing in private companies can be risky. However, when we read about companies the likes of Google, Netflix, Microsoft, Amazon and others, we need to remember that they got started with, yes, private capital. While searching for the next “big” private capital idea can be daunting, investors can take several avenues to both mitigate risk and yet gain the potential of this robust investor sector. They include focusing on professionally managed funds that specialize in this sector, as well as consulting with seasoned investment pros who can provide the proper analysis.
The opportunity here is normally to invest for tax reduction due to various tax bills that reward this sector, as well as the large income opportunity this alt category may provide. Some companies and/or strategies here provide an investor a turn-key opportunity with limited hassle, not to mention this category has many long-term track records of success.
One can own real estate directly, or through an REIT (real estate investment trust). Promoters of real estate claim it has created more millionaires in American history than any other industry. And while we have always heard that the key to successful real estate investing is “location, location, location,” I would argue it is “Strategy, strategy, strategy.” That is, whether it is a personal strategy or picking the right manager to do it for you, real estate provides an alternative hedge against other markets and may provide a steady and predictable income in your saving and retirement years.
Building out new niches or technologies requires capital and infrastructure. Think 5G wireless towers or cold storage facilities. Whatever the niche or need, obviously our society cannot function without infrastructure. Meaning, investors can take advantage of these hard assets to meet their financial objectives for income, tax reduction and potential growth.
Investors should consider alternative investments for their non-correlation to traditional markets which can help you maintain your lifestyle, increase your income, and reduce your taxes. And alts may even experience an IPO or market exit at multiple times their initial investment.
Regardless of the reason an investor is attracted to alts, they certainly have good company. Powerful organizations such as pension funds and endowments are large buyers of alternative investments. What do these large investors know? Perhaps alts are a better path to riches while lowering volatility and risk.