In general, alternative investments is a very broad category. It includes investments not under the standard investment assets which are equities, bonds and cash.
What Are Alternative Assets?
The alternative assets include funds such as private equity, hedge funds and venture capital. They also include commodities which can be divided into soft commodities (coffee, corn, cotton) and hard commodities (gold, silver, oil). Another popular type is collectibles such as wine and fine art.
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Why Invest In Alternative Assets?
One of the key benefits of investing in alternative assets is low or even negative correlation with traditional asset classes. Alternative assets such as commodities are based on basic demand and supply factors and there will always be a market for energy type assets i.e. oil. Like stocks, consumable commodities can also act as a hedge against inflation due to growing population.
Investing In Private Businesses and Startups
Private equity allow investors to take up stakes in private businesses which are not publicly traded. Some of the fastest growing companies are usually private companies. For high risk takers, venture capital investments allow them to invest in generally unproven technology type companies, for e.g. Facebook, Google where the risks of failing is extremely high but a successful investment will generate massive returns. Such investments are generally assessed based on the track record and competence of the management team.
Problems With Alternative Assets
Investing in alternative assets have its own set of problems though. One of the key issues for alternative assets is liquidity. Private equity and venture capital funds generally have pre specified lock in periods where investors will be unable to take back their money. The market for collectibles also tend to be quite limited and it will not be easy to sell at required valuations.
Valuations for collectibles tend to be a rather large problem, it is not easy to determine a value for example for art pieces as they are generally unique. Certain commodities like gold are also practically impossible to determine valuation as they do not generally cash flows and the demand is investment driven rather than consumption driven.
Are Property Investments Considered Alternative Assets?
While properties do not belong to the standard investment asset classes, I wouldn’t lump them together in the category alternative assets either. Property investments do not suffer from valuation problems like the rest of the alternative assets as they can be valued easily. Liquidity is also not as large an issue as there is generally a ready market, just that the process takes longer. Property investments should stand alone by itself from a portfolio allocation perspective.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).
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