Alternative investments encompass a wide range of investment opportunities, such as real estate, commodities, hedge funds, private equity and more. These investments typically have low correlation with the stock market, providing a hedge against market volatility and helping to reduce overall portfolio risk. By incorporating alternative investments into your portfolio, you can potentially enhance returns and achieve better wealth preservation over the long term.
Alternative investments often require a longer investment horizon and may not be suitable for all investors due to their complexity and higher minimum investment requirements. However, for investors seeking diversification, downside protection, and potentially higher returns, including alternative investments in their portfolio can offer a valuable opportunity to achieve investment goals.
What are Alternative Investments?
Alternative investments are assets that don’t fit into traditional categories like stocks, bonds, or cash. They include things like real estate, private equity, hedge funds, commodities (gold, oil, etc.), cryptocurrencies, and even collectibles like art or rare wine. These investments often have higher risks but can offer big rewards and help diversify a portfolio. Unlike stocks, they can be harder to buy and sell quickly, and they sometimes require specialized knowledge to invest in. They’re popular with wealthy investors and institutions looking for ways to grow their money beyond traditional markets.
9 Types of Alternative Investments to Consider
The range of alternative investments beyond the traditional asset classes is wide. The list below isn’t close to exhaustive, but it does represent the best alternative investments you can make right now.
Real Estate
Real estate is the largest investment asset in the world. Investing in real estate means you are buying land or residential or commercial property. Alternatively, it can mean that you’re doing either of those through a real estate investment trust (REIT).
Buying residential or commercial real estate as an investment can provide you with cash flow through rental income. It also can appreciate over time, bringing you equity.
If you don’t want to collect rent and take care of a property, you can invest in a REIT. A REIT manager invests your money in different properties, manages them, collects rent and shares the annual profits with you.
Like many alternative investments, real estate requires expertise and patience. You must do your research and understand your risks.
- Residential or commercial rental property: You buy a building and collect rent.
- Real estate investment trust: Your money is pooled through a REIT manager who buys properties, manages them and shares the rent with you.
- Land: You can subdivide the land, develop it yourself or let it appreciate.
An added benefit of real estate investing is that the market is far less volatile than stocks and bonds.
>>Invest in Real Estate: Arrived
Lending
Lending allows you to earn interest on what you loan and also earn your money back when the loan is paid off. Here are two types of lending used in alternative investing:
- Peer-to-peer lending (P2P): Done online without financial institutions, you can use this to select your borrower based on income, credit and other factors and typically charge a higher interest rate.
- Mortgage debt: You can buy defaulted mortgages at a discount and profit from the difference between what you paid and what is paid back or lend to borrowers who want to buy or refinance.
Lending is an alternative investment that can give you high returns. However, this investment also has risks: default, fraud and failure of online platforms.
>>Invest in Lending: Yieldstreet
Fine Art and Collectibles
Investing in fine art typically has been left to high-net-worth individuals. That said, famous paintings and other collectibles — rare coins, vintage cars, jewelry, wine, trading cards — are being bought and sold among retail investors.
Collectibles are a tangible investment and typically appreciate. However, to avoid being scammed, you need expertise, and you will find these investments harder to turn into cash if you have a financial need.
>>Invest in Fine Art: Masterworks
>>Invest in Collectibles: Public.com
Gold and Precious Metals
There are several ways to invest in gold and other precious metals, such as silver, platinum and palladium. You can buy physical metal, such as bars, coins or jewelry, or you can invest in gold exchange-traded funds (ETFs), gold mutual funds, mining stocks or futures.
These securities track the price of the precious metal. They are more liquid than when you’re holding the physical metal. You can buy stock in companies that mine gold and silver for a higher return. However, mining company stocks come with a higher risk.
>>Invest in Gold and Precious Metals: American Alternative Assets
Commodities
If you’re investing in commodities, you’re trading raw resources and materials. Gold is a commodity, as is oil and natural gas.
You can buy futures contracts or gain access through ETFs. Commodities can be volatile, though. Thus, it’s important to think about how gasoline fluctuates because of oil prices. But commodities offer diversification and a hedge against inflation as the rise in price helps you.
>>Invest in Commodities: Plus500
Cryptocurrencies
If you have a tolerance for a volatile asset and are ready for virtual alternative investing, cryptocurrencies such as Bitcoin, Ethereum, Tether, Solana, Binance Coin and more might be for you. These digital or virtual currencies use a decentralized ledger known as Blockchain for security and transactions.
The price of cryptocurrencies has shot up as their popularity has grown. The price in May 2016 was $500. It traded at $45,800 on Jan. 2, 2024, according to Forbes. Ethereum is right behind Bitcoin, selling for $11 in April 2016 and $2,416 in January 2024.
These digital currencies don’t have much regulation, but governments are increasingly beginning to look at issues of consumer protection, financial stability, competitiveness and financial inclusion.
>>Invest in Crypto: Gemini
Crowdfunding
Through an online platform, you can raise money from a large number of people for a business, project or cause. This is known as crowdfunding, and it can allow you to invest your money in a way not available through traditional investing.
It can also be a great way to diversify your portfolio, earn a higher return or impact your community. However, it also comes with high risk, such as fraud, lack of regulation, volatility and illiquidity.
>>Invest in Crowdfunding: Fundrise
Private Equity
Private equity is a way for you to invest in companies whose stocks are not publicly traded. As an investor, private equity doesn’t just allow you to diversify your investments and earn a high return. It also provides you with an opportunity to influence a company’s management and strategy.
Illiquidity and higher risks and costs are the downsides. Thus, this kind of alternative investment is better left for investors who can weather high volatility and a long-term commitment of capital.
Hedge Funds
A hedge fund is an investment fund that trades assets that are relatively liquid. Hedge fund managers use different investment strategies — long-short equity, market neutral and quantitative strategies — to attempt to earn a high return on their investments. Hedge funds are exclusively the dominion of institutional investors and high-net-worth individuals.
Understanding Alternative Investments
Once strictly the domain of institutional investors and high-net-worth people, the alternative investment industry has recently soared in popularity. Individual investors might have stayed away because some alternative investments are complex, and most are illiquid, which means they can’t be sold quickly to get cash.
According to the Chartered Alternative Investment Analyst Association (CAIA), alternative investments represented $18 trillion in assets under management (AUM) in 2020. In other words, they made up 12% of the $153 trillion global investment market that year.
PwC’s estimate of global AUM is lower — reaching $145.4 trillion by 2025. However, investments in alternative asset classes are expected to reach $21.1 trillion, or 15% of the market, by next year.
Alternative investments are assets that aren’t traditional stocks, bonds or cash. Alternative investments include, but extend beyond, these assets:
- Real estate
- Lending
- Gold and precious metals
- Commodities
- Fine art and collectibles
- Cryptocurrencies
- Crowdfunding
- Private equity
- Hedge funds
The number of alternative investments has grown because investors want assets with lower correlations, which refers to how two securities move in relation to each other. This is desirable because interest rates have risen, and inflation has remained high.
A lower correlation also means that assets are less likely to move in the same direction if the economy dips. In addition, most alternative investments aren’t tied to traditional financial markets.
Find Your Alternative Investment and Diversify
When selecting alternative investments, it's important to conduct thorough research and due diligence. Each alternative asset class comes with its own set of risks and rewards, so understanding how these investments fit into your overall financial goals is key.
By finding your alternative investment options and diversifying your portfolio, you can better protect your wealth against market downturns and capitalize on a broader range of investment opportunities. Working with a financial advisor or investment professional can help you navigate the complexities of alternative investments and tailor a strategy that aligns with your risk tolerance and objectives.
Frequently Asked Questions
What is the best alternative investment?
Are alternative investments high return?
How to invest in alternative investments?
Investing in alternative investments is a strategy that involves diversifying your portfolio beyond traditional options like stocks and bonds. Alternative investments can include real estate, private equity, hedge funds, commodities, and more. These investments typically have a lower correlation to the stock market, providing a way to potentially earn higher returns and reduce overall portfolio risk.
About Sarah Edwards
Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.
