What are Alternative Investments?

Alternative investments are financial assets that do not form part of the conventional investment categories such as bonds, stocks, or cash. They include private equity, hedge funds, art and antiques, commodities, and managed funds. Some investors also consider real estate as an alternative investment option. For the most part, alternative investment assets are managed by accredited, high-net-worth individuals due to their lack of regulation, complex nature, and degree of risk. These investment options also have a low correlation of returns compared to those of conventional investments. This means that the market performance of traditional investments rarely affects the outcome or gains of alternative investments. Furthermore, alternative assets are often illiquid; thus, investors find it considerably more difficult to cash out whenever they want.

Alternative Investment Options During a Pandemic

As investors navigate the world of investing during a pandemic, alternative investment options are slowly gaining attention as a way of strengthening and diversifying portfolios. When most businesses paused their operations after lockdowns were implemented, the markets went down, prompting a fall in prices. If you were to invest in real estate when the markets are down, there is a greater chance of profitability in the future. Experts agree that sometimes the best way to approach alternative investing is to do nothing. As an investor, your primary goal during uncertain times should be to buy and hold the asset regardless of how the market performs. So, find asset classes that suit your profile, add them to your portfolio and wait.

The Illiquid Nature of Alternative Investments

Although alternative investing presents opportunities for investors to enhance their portfolios, most investors are often skittish about illiquid alternatives. One of the primary reasons that makes them illiquid is because alternative investments are rarely publicly traded or priced. Although investors are worried about tying up their money in assets that they can’t sell or exchange easily, illiquidity can work to an investors’ advantage. For example, some alternatives hold on to investors’ investment for as long as a decade which may help smooth out the ups and downs of portfolio swings. 

Another interesting argument for the benefits of illiquidity is lower volatility. Since investors can’t buy or sell illiquid alternatives easily, they’re less prone to chaotic market sell-offs. Although alternative investments could be experiencing similar ups and downs as traditional investments, these options typically focus only on the exit price and not the consistent fluctuations.

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