Learning Resources

Investing in Alternative Assets

18 Feb 2022

Investing in Alternative Assets | VI

Investing isn’t a one-way nor a two-way road. You can opt to tread a couple of connected pathways or divert from where the majority goes. It will all depend on what you want to achieve, your risk tolerance, and how much you’re willing to invest.

So if you’re an investor who’s more comfortable in investing in traditional asset classes, like stocks and bonds, then by all means do so.

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Meanwhile, if you’re looking to explore other types of investment other than the popular options, you’re welcome to read this guide on alternative assets.

Alternative assets

Alternative assets or “alternatives” are financial investment options that are not included in the traditional asset classes line-up: equity assets, fixed income assets, cash and cash equivalents, and real assets (although some would argue that real assets can be classified as alternative investments).

This means you, as an investor, have other means to invest your money. Of course, there are pros and cons with whichever investment vehicle you choose.

Some of the popular alternative assets you might want to consider are private equity, private credit, and hedge funds. But maybe you’d ask why they are not included in the main asset classes.

There are several justifications for this. First, alternative assets are more complex as compared to the conventional asset classes. They are also not as heavily and meticulously regulated as the latter.

Hence, for a typical retail investor, these alternative assets often feel “unreachable” and “intimidating.” This is also why the majority of investors in alternative assets are high net-worth and accredited investors.

Types of alternative investments

Types of Alternative Assets | VI

Should you be interested in investing in these alternates, these are the most popular examples you can explore.

1. Private equity

This type of alternative asset is all about investing in private companies. As compared to traditional equity assets, i.e., stocks, which is all about investing in publicly traded companies to obtain ownership, private equity focuses on companies that are not listed on a public exchange.

Private equity can come in the form of venture capital (meant for startups), growth capital (meant for mature companies that wish to expand or do some restructuring), or buyouts (buying a company or one of its divisions).

2. Private credit/debt

Private debt or private credit refers to investments that aren’t financed by banks or traded in an open market.

While the above alternative asset, private equity, aims to have ownership in the business through investment, private debt is just credit lent to a business that needs additional capital. If you have a company that issues private debt funds, your investment is anchored on the premise that your money will be repaid through interest payments plus the initial capital.

3. Hedge funds

You might have heard of hedge funds before, as this term is often mentioned side by side mutual funds and exchange-traded funds. But hedge funds are different from the two.

A hedge fund is a pooled investment, yes, but it is actively managed and uses sophisticated investment strategies which aim to maximise returns and obtain a market-beating performance. In fact, hedge funds are, up until now, controversial in nature – the same reason why investing in this alternative asset is exclusive to high net-worth investors.

As mentioned above, some sources would add to the list of alternative assets some other investment vehicles like real estate, commodities, and collectables. If you want to learn more about these asset classes, here’s where to get more information.

Pros of investing in alternative assets

Alternative investments exist because they offer several advantages to suitable investors. Among the top benefits of investing in alternative assets are profitability, diversification, and stability.

As most alternative assets are not traded in the public space, you get to have access to unique instruments that further diversify your portfolio, and even give you opportunities to achieve higher returns, especially if you invest in assets that are not hugely affected by macroeconomic changes.

Likewise, if you think about this, alternative investments, as compared to stocks, are less volatile in that they don’t rely on market sentiments. This is why the majority looks at these assets when they want to have portfolio stability.

Cons of investing in alternative assets

Alternative assets are highly risky and do not provide you with liquid investments.

If you compare stocks with private equity investments, which do you think would be cashed out easier? Alternative assets are illiquid, meaning they cannot be easily sold on the open market. Besides having a higher minimum investment threshold, these alternative investments will have fewer interested buyers/investors in case you want to sell your investments off.

This is because alternative assets often have what we call a “lock-up period.” For private equity, the lock-up period can be 10 years or even more. For hedge funds, it can be a month or a year. This means you cannot withdraw your capital within a specified period.

Every type of investment, however, has its pros and cons. Each has its level of risk, as you as an investor would also have. Hence, by now, you should know that investments ought to be done with careful consideration. Likewise, remember to only invest what you’re prepared to lose.

DISCLAIMER

This article and its contents are provided for information purposes only and do not constitute a recommendation to purchase or sell securities of any of the companies or investments herein described. It is not intended to amount to financial advice on which you should rely.

No representations, warranties, or guarantees, whether expressed or implied, made to the contents in the article is accurate, complete, or up-to-date. Past performance is not indicative nor a guarantee of future returns.

We, 8VI Global Pte Ltd, disclaim any responsibility for any liability, loss, or risk or otherwise, which is incurred as a consequence, directly or indirectly, from the use and application of any of the contents of the article.