An alternative investment, also known as an alternative asset or alternative investment fund (AIF), is an

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

in any asset class excluding capital stocks, bonds, and

cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In book-keeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-i ...

. The term is a relatively loose one and includes tangible assets such as

precious metals Precious metals are rare, naturally occurring metallic chemical elements of high economic value. Precious metals, particularly the noble metals, are more corrosion resistant and less chemically reactive than most elements. They are usual ...

, collectibles ( art,

wine Wine is an alcoholic drink made from Fermentation in winemaking, fermented fruit. Yeast in winemaking, Yeast consumes the sugar in the fruit and converts it to ethanol and carbon dioxide, releasing heat in the process. Wine is most often made f ...

, antiques,

vintage car A vintage car is, in the most general sense, an old automobile, and in the narrower senses of car enthusiasts and collectors, it is a car from the period of 1919 to 1930, Either a "survivor" or one that has been fixed up according to the or ...

coins A coin is a small object, usually round and flat, used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order to facilitate trade. They are most often issued by ...

, watches, musical instruments, or stamps) and some financial assets such as real estate,

commodities In economics, a commodity is an economic good, usually a resource, that specifically has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Th ...

private equity Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...

distressed securities In corporate finance, distressed securities are security (finance), securities over companies or government entities that are experiencing Financial distress, financial or operational distress, Default (finance), default, or are under bankruptcy. ...

, hedge funds, exchange funds,

carbon credits Carbon offsetting is a carbon trading mechanism that enables entities to compensate for offset greenhouse gas emissions by investing in projects that reduce, avoid, or remove emissions elsewhere. When an entity invests in a carbon offsetting p ...

venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...

, film production,

financial derivatives In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements: # an item (the "underlier") that can or must be bou ...

cryptocurrencies A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records ...

, non-fungible tokens, and Tax Receivable Agreements. Investments in real estate,

forestry Forestry is the science and craft of creating, managing, planting, using, conserving and repairing forests and woodlands for associated resources for human and Natural environment, environmental benefits. Forestry is practiced in plantations and ...

and

shipping Freight transport, also referred to as freight forwarding, is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ...

are also often termed "alternative" despite the ancient use of such real assets to enhance and preserve wealth. Alternative investments are to be contrasted with

traditional investments In finance, the notion of traditional investments refers to putting money into well-known assets (such as Bond (finance), bonds, cash, real estate, and equity shares) with the expectation of capital appreciation, dividends, and interest earnings. ...

Research

As the definition of alternative investments is broad, data and research vary widely across the investment classes. For example, art and wine investments may lack high-quality data. The Goizueta Business School at

Emory University Emory University is a private university, private research university in Atlanta, Georgia, United States. It was founded in 1836 as Emory College by the Methodist Episcopal Church and named in honor of Methodist bishop John Emory. Its main campu ...

has established the Emory Center for Alternative Investments to provide research and a forum for discussion regarding

hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...

, and

investments.

Access to alternative investments

In recent years, the growth of alternative finance has opened up new avenues to investing in alternatives such as the following:

Art

In a 1986 paper, William Baumol used the repeat sale method and compared prices of 500 paintings sold over 410 years before concluding that the average real annual return on art was 0.55%. Another study of high-quality oil paintings sold in Sweden between 1985 and 2016 determined the average return to be 0.6% annually. However, art gallerists are sometimes ambivalent to the idea of treating artwork as an investment. Art is also notoriously difficult to value, and there are quite a few factors to bear in mind for

art valuation Art valuation, an art-specific subset of Valuation (finance), financial valuation, is the process of estimating the market value of Work of art, works of art. As such, it is more of a financial rather than an aesthetics, aesthetic concern, ...

Equity crowdfunding

Equity crowdfunding Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...

platforms allow "the crowd" to review early-stage investment opportunities presented by entrepreneurs and take an equity stake in the business. Typically an online platform acts as a broker between investors and founders. These platforms differ greatly in the types of opportunities they will offer up to investors, how much due diligence is performed, degree of investor protections available, minimum investment size and so on. Equity crowdfunding platforms have seen a significant amount of success in the UK and, with the passing of JOBS Act Title III in early 2016, are now picking up steam in the United States.

Infrastructure as an asset class

The notion of “infrastructure as an asset class” has grown steadily in the past seven years. But, so far, this development has been the preserve of institutional investors: pension funds, insurance companies and sovereign wealth funds, with very limited access to high-net-worth investors (except a few large

family office A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with at least $50–100 million in investable assets, with the goal being to effectively grow and transfer ...

s).

SEIS and EIS funds

Only available in the UK, SEIS funds and EIS funds present a tax-efficient way of investing in early-stage ventures. These work much like venture capital funds, with the added bonus of receiving government tax incentives for investing and loss relief protection should the companies invested in fail. Such funds help to diversify investor exposure by investing in multiple early ventures. Fees are normally charged by the management team for participating in the fund, and these can end up totaling anywhere between 15% and 40% of the fund value over the course of its life.

Lease investing

Lease investing platforms provide investors with options to co-invest and have partial ownership in physical assets that earn

lease A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...

income. Through these platforms, investors can have fractional ownership of a particular asset leased to an organization and earn fixed returns.

Private equity

Private equity Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...

consists of large-scale private investments into unlisted companies in return for equity. Private funds are typically formed by combining funds from institutional investors such as high-net-worth individuals, insurance companies, university endowment funds and pension funds. Funds are used alongside borrowed money and the money of the private equity firm itself to invest in businesses they believe to have high growth potential.

Venture capital

Venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...

consists of private investments made into young start-up companies in exchange for equity. Venture capital funds are typically formed by drawing capital from seed money, or angel investors. Nowadays,

crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative finance, to fund projects "withou ...

is also used by start-up companies for capital.

Accredited investors An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor (if any), and the consequences of being classified as such, vary between countries. Generally, ac ...

such as high-net worth individuals, banks, and other companies will also invest in a start-up company if it grows to a large enough scale.

Investors

The 2003 Capgemini World Wealth Report, based on 2002 data, showed high-net-worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007, this had reduced to 9%. No recommendations were made in either report about the amount of money investors ''should'' place in alternative investments. As of 2019, the global breakdown of financial assets included a 13% allocation to alternative investments. Gold bullion 2

Characteristics

Alternative investments are sometimes used as a way of reducing overall investment risk through diversification. Some of the characteristics of alternative investments may include: *Low

correlation In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...

with traditional financial investments such as stocks and bonds *It may be difficult to determine the current market value of the asset *Alternative investments may be relatively illiquid (see " liquid alts") *Costs of purchase and sale may be relatively high *There may be limited historical risk and return data *A high degree of investment analysis may be required before buying

Industry

Alternatives may be offered by traditional investment companies or specialized companies. Among companies which specialize in alternative investments, some offer a variety of strategies others offer only a specific type. In 2023, Blackstone, which specializes in only alternative investments including private equity, private debt, real assets, hedge funds, and hedge funds of funds, became the first alternative investment manager to reach $1 trillion in assets under management (AUM). Other notable alternative asset managers include

Apollo Apollo is one of the Twelve Olympians, Olympian deities in Ancient Greek religion, ancient Greek and Ancient Roman religion, Roman religion and Greek mythology, Greek and Roman mythology. Apollo has been recognized as a god of archery, mu ...

, Brookfield, KKR, and Carlyle, each of which have hundreds of billions in AUM. As of 2023, traditional asset management companies had begun to offer alternatives including

BlackRock BlackRock, Inc. is an American Multinational corporation, multinational investment company. Founded in 1988, initially as an enterprise risk management and fixed income institutional asset manager, BlackRock is the world's largest asset manager ...

, T. Rowe Price, and

Franklin Templeton Investments Franklin Resources, Inc. is an American Multinational corporation, multinational investment management holding company that, together with its subsidiaries, is referred to as Franklin Templeton; it is a global investment firm founded in New York ...

Liquid alternatives

Liquid alternatives ("alts") are alternative investments that provide daily liquidity. Liquid alternative investments should produce returns uncorrelated to GDP growth, must have protection against systemic market risk and should be too small to create new systemic risks for the market.

Hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...

s may be included in this category; however, traditional hedge funds may have liquidity limitations, and the term is usually used for registered mutual funds which use hedge fund strategies such as long-short equity investments.

United States

Liquid alternatives became popular in the late 2000s, growing from $124 billion in assets under management 2010 to $310 billion in 2014. However, in 2015 only $85 million was added, with 31 closed funds and a high-profile underperformance by the largest long-short equity fund at the time, Marketfield Fund. In 2014 there were an estimated 298 liquid alternative funds with strategies such as long-short equity funds; event-driven, relative value, tactical trading (including managed futures), and multi-strategy. This number does not include option income funds, tactical shorting and leveraged indexed funds. There has been expressed skepticism over the complexity of liquid alts and the lack of able portfolio managers. One of the world's largest hedge fund managers, AQR Capital, began offering funds in 2009, and grew from $33 billion in

assets under management In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institutio ...

(AUM) in 2010 to $185 billion in AUM in 2017 driven in part by marketing mutual-fund like products with lower fees. As of 2016, AQR Capital was the largest manager of liquid alts.

References

External links

''Portfolio Diversification benefits of Investing in Stamps'' by Chris Veld, University of Stirling. (Incomplete first draft)
{{Investment management, state=collapsed Investment