In general terms, an investment entails using cash with the goal of generating future profits. When discussing investments, we typically allude to conventional avenues like cash, stocks, bonds, deposits, and other fixed-term securities, with the intention of reaping benefits in the future.
Alternative Investments
Nevertheless, certain investments deviate from the norm. There are investments that are not considered to be our conventional investments due to their unique composition, pricing structure, ownership terms, access and attributes. These investments are known as Alternative investments.
Defining alternative investments can be somewhat complex; however, for the sake of simplicity, we can consider them as investments that possess characteristics differing from the liquidity, regulation, conventionality, and commonness typically associated with traditional investments available to the general public.
Alternative investments are usually owned by institutional investors, clients of private funds and high-net-worth individuals.
4 Common Alternative Investment Categories
I will present an overview of four major alternative investments categories:
1. Real Assets
These investments include real estate, lands, properties, infrastructures, commodities or natural resources. The buyers own the underlying asset.
2. Hedge funds
A hedge fund is an organised investment vehicle. These institutions are less regulated and utilise a range of investment opportunities and trading strategies to generate profits for the clients and charge fees in return.
I have written an article on hedge funds that I highly recommend everyone to read:
3. Private equity
Private equity is essentially a non-publicly traded equity/ownership and debt investment. Private equity can be a higher-risk investment. Private equity includes funding new ventures, buying existing businesses, leveraged buyouts, and distressed debt to mezzanine financing.
4. Structured Products
Structured products are derivative financial instruments that are structured and customised to generate unique cashflows and risk/return profiles for investors through leverage, securitisation and coupons. Notes, CDOs and credit derivatives are common structured products.
We can also further introduce other types e.g. digital assets, but broadly speaking, alternative investments can be categorised into the aforementioned four categories.
