Investing can take you in unique directions when you look beyond stocks, bonds, and cash, opening new avenues for growth. Alternative investments present many opportunities that appeal to seasoned investors and those looking to diversify their wealth and plan for the future.
Alternative investments are financial assets that include private equity, hedge funds, real estate, commodities, and collectibles, which do not fall within the traditional categories of public stocks, bonds, or cash.
Traditional Investments vs. Alternative Investments
Traditional investments, such as stocks, bonds, and mutual funds, have long been the go-to choices for many. They offer liquidity and are generally regulated, which can appeal to those valuing predictability. However, they are not immune to market swings and pose some risks when the market turns volatile.
Alternative investments offer a different risk-return profile. Focusing on assets less correlated with the stock market, they can act as a buffer, hedging against economic downturns. However, they can also be more complex to manage and often lack regulation, increasing your risk when using them. Although they bring unique challenges, their potential to protect and grow wealth in uncertain times can make them worth considering.
Types of Alternative Investments
Since alternative investments are simply any investment other than stocks, bonds, or cash, many options are available.
Real Estate
Real estate investment involves purchasing, managing, and financing properties to generate returns through income streams or long-term capital appreciation. These investments can encompass residential, commercial, and industrial properties.
It’s also one of the more popular types of alternative investment, as about a quarter of Canadians say they’re likely to buy an investment property in the next 5 years.
Real estate could generate ongoing cash flow through rental income through long-term tenancies or short-term rentals of second rooms or properties or by buying properties at a lower price and selling them for a later profit.
If you’re not interested in buying and managing physical property, you can instead buy shares in a real estate investment trust (REIT) that owns, operates, or finances property.
Private Equity/Venture Capital
Private equity and venture capital focus on funding businesses that are not listed on public exchanges. They aim to enhance these companies’ value over time and grow their success—and your own wealth. These investments offer a chance to participate in the next big innovation and yield potentially impressive returns.
Private equity typically involves investing in established, mature companies seeking new growth opportunities or a turnaround. This may offer financial backing for operational improvements, strategic redirections, or acquisitions, as the case may be.Venture capital specifically targets young, high-potential startups to fuel innovation and expansion. Both types of investments often demand substantial commitment and carry inherent risks. Investors may be expected to engage with the company’s management, providing capital and strategic guidance.
Hedge Funds
Hedge funds pool capital from multiple investors to pursue varied investment strategies, ranging from leveraging equities to other high-risk techniques, such as leverage, derivatives, and short-selling.
In some ways, you can think of hedge funds as the alternative way to approach traditional investments. Unlike mutual funds, hedge funds are less regulated, offering managers the flexibility to invest across various asset classes—stocks, bonds, and commodities—to achieve their investment objectives.
The primary aim of hedge funds is to generate high returns regardless of market conditions. They also generally require a substantial minimum investment and charge significant management and performance fees. These fees are often structured as “2 and 20,” meaning a 2% annual management fee coupled with a 20% cut of the profits above a certain threshold.
Commodities
Investing in commodities like gold, silver, oil, or agricultural products can provide a hedge against inflation. These tangible assets have real-world uses in manufacturing and beyond, allowing them to retain their intrinsic value. They’re often seen as safe options in turbulent times.
Commodities can be acquired directly through futures contracts, exchange-traded funds (ETFs), or mutual funds focusing on commodity markets. However, because these assets are valued based on supply and demand, they’re greatly influenced by several factors, from geopolitical events to technological advancements and even the weather.
Art & Collectibles
Some investors have found success in turning their hobbies into investments. Art and collectible investing is an exciting way to acquire unique, tangible assets. While commodities find value in their practical worth, these objects hold historical and cultural value.
Classic examples include paintings, sculptures, rare coins and stamps, vintage wines, and historical artifacts, but many comic books, trading cards, and toys have massively increased in value among hobbyists.
This investment can be illiquid and can change significantly as culture shifts. It’s difficult to predict what will become historically significant, as anyone who hoarded Beanie Babies in the 90s can attest to. You may get the aesthetic benefits collectors crave, but determining the value of a rare piece requires specialized knowledge.
Broaden Your Horizons with Qopia Financial
Alternative investments offer both potential rewards and unique challenges. While they can provide high returns, access to exclusive opportunities, and diversification benefits, they often come with drawbacks such as illiquidity, high minimum investment thresholds, and a lack of regulation or market data in specific sectors.
If you’re interested in exploring alternative investment opportunities but don’t know where to start, our team at Qopia Financial is here to provide advice and guidance. Contact our team for a consultation, and let’s explore how we can broaden your investment strategy with insights tailored to your financial goals.
