How to Invest in Alternative Asset Classes

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Contributor, Benzinga
June 25, 2023

You’ve done the hard work saving and now you’ve reached the next stage: investing your money to (hopefully) watch it grow! While your first instinct may be to invest in traditional asset classes like stocks and bonds, it’s important to realize you have many other options. Alternative asset classes, such as artwork, real estate and collectibles, offer unique opportunities for diversification and higher returns. 

Take a look at what alternative asset classes are and how to invest in them. This article also discusses the potential risks and rewards of these investments, so you can decide whether they're right for you. 

Why Diversify Your Portfolio With Alternative Investments?

Diversifying your portfolio with alternative investments can add outperformance that is not linked to traditional public market returns. Alternative investments provide access to asset classes uncorrelated to traditional markets, such as real estate, private equity and commodities. Alternatives may offset the performance of other assets in your portfolio, potentially providing better risk-adjusted returns.

8 Types of Alternative Asset Class Investments

Alternative asset classes refer to investments outside the traditional categories of stocks, bonds and cash. 

Here are eight types of alternative asset classes to consider:

Wine and Spirits

Wine and spirits investments can be made by buying physical bottles of wine and spirits, investing in wineries or distilleries or buying shares in companies that produce or distribute these products.

Investing in wine and spirits can be risky because the value of these assets can fluctuate based on factors such as vintage, scarcity and market demand. Bottles can also be expensive to store and maintain, which makes it difficult to collect them on your own. 

But wine and spirits — especially those from high-quality producers and regions — can increase in value over time. Not only are they potentially lucrative investments, but they offer the opportunity to own a unique and prestigious asset class. Investing in wine and spirits can also provide diversification benefits because their performance is not necessarily tied to broader market trends.

Agriculture

Agriculture is a real asset related to food and other agricultural products. Investments in agriculture can be in the form of purchasing farmland, investing in agricultural companies or buying shares in agriculture-related mutual funds or exchange-traded funds (ETFs).

Food production fulfills a basic human need with constant demand. With a rising global population, the demand for agricultural products could continue to increase, providing investors with the opportunity to earn returns from their investments. 

Investing in agriculture offers the benefits of potential long-term value appreciation and the opportunity to invest in a sector essential to human survival. 

On the other hand, the market for agricultural investment can be complex, and you may need specialized knowledge to make informed decisions. Agriculture investing can also be highly risky as the value of agricultural assets is affected by unpredictable factors, including changes in weather patterns, shifts in global economic conditions and changes in government policies. 

Startups

Investments in startups focus on early-stage companies looking to grow and develop their businesses. You can invest directly in individual startups or purchase shares in venture capital or private equity funds focused on startups.

Startups can be a valuable addition to your portfolio because they provide an opportunity to invest in innovative companies with the possibility of above-average returns.

But investing in startups is risky. Historically, a large percentage of startups fail, and the success of individual startups is challenging to predict. 

Artwork

Buying and owning artwork, such as paintings, sculptures and other forms of visual art, represents another alternative investment. This can include purchasing individual works of art or investing in art funds.

Artwork may be illiquid — it can be challenging to sell and manage as an individual investor.

But artwork can yield high returns and give you access to another prestigious asset class. Unique pieces of art, especially those created by well-known and highly regarded artists, can grow in value over time, generating healthy returns.

Litigation Finance

In litigation finance investing, investors provide funding to individuals or companies involved in legal disputes in exchange for a share of any potential settlement or judgment. This type of investment can be made through specialized litigation finance companies or investment funds focusing on this asset class.

Legal disputes often result in large settlements or judgments, allowing investors to earn substantial returns on their investments. But it is tough to predict the outcome of legal disputes, and there's no guarantee that an investment will result in a positive return. 

Collectibles

Investors may remember collecting random knick-knacks at a young age, but collectibles as an asset class are items that have value because of their rarity or uniqueness. This can include many items, such as stamps, coins, sports memorabilia and vintage cars.

As collectibles become more valuable over time, they can earn attractive returns for investors. But they can be expensive to purchase, store and maintain, raising their risk profile.

Music Royalties

Music royalties deal with the ownership of rights to original music. Investors can buy the rights to individual songs or musical compositions or invest in companies or funds that specialize in acquiring and managing music royalties.

Music royalties provide investors with a passive income stream. When a song or composition is used, the rights owner is entitled to receive a royalty payment. These payments can continue for the life of the copyright. 

Carbon Credits

Environmentally focused investors can trade carbon credits that own the right to emit a specific amount of greenhouse gases. These credits are often created through government-mandated emissions trading programs, which allow companies to buy and sell the right to emit a certain amount of greenhouse gases.

By buying carbon credits, investors can help to reduce greenhouse gas emissions and fight climate change while also earning returns on their investments. Besides the financial rewards, investors also enjoy the benefits of investing in a socially and environmentally responsible asset class. 

One downside of investing in carbon credits is the lack of regulation. Because carbon credits are a relatively new and complex financial instrument, there is currently no global regulatory framework governing their trade, making it difficult for investors to evaluate the quality and value of different carbon credits on their own.

How to Invest in Alternative Assets in One Place

Hedge funds are often considered a way to invest in alternative assets in one place, because they can invest in a broad range of assets, including stocks, bonds, real estate, commodities and other alternative assets. These funds pool money from multiple investors and use a range of investment strategies. Rather than managing their own investments, investors leverage the expertise of a team of professional managers.

While employing various investment styles, such as long/short, absolute return or event-driven strategies, hedge funds use a number of tools to manage risk and protect against potential losses. Hedge funds may short sell or use derivative financial products to manage risk.

Another benefit of investing in hedge funds is that they can help with portfolio diversification. By investing in a range of assets and strategies, hedge funds can provide noncorrelated returns and potentially increase returns. 

Diversify Your Portfolio with Alternative Asset Classes

Investing in alternative assets can provide diversification and potential for higher returns, but they can also be riskier and more illiquid than traditional assets. 

Hedge funds can be a profitable way to invest in alternative asset classes as they allow you to hold all your assets in one place, managed by professionals. 

Finally, investing always involves risks, so it's essential to carefully research and understand any investment's risks and potential rewards before making a decision.

Frequently Asked Questions

Q

What are alternative asset classes?

A

Alternative asset classes are investments that are not typically found in traditional markets of stocks, bonds or cash. Examples of alternative asset classes include real estate, private equity, venture capital, hedge funds, commodities, art, wine and music royalties.

Q

Why do people invest in alternative assets?

A

People invest in alternative assets for various reasons, including diversification, the potential for higher returns, access to investments not available through traditional markets and the ability to hedge against market volatility.

Q

Are alternative investments safe?

A

Alternative investments can be safe for informed investors. It is vital to understand the risks associated with each type of alternative investment before investing.

About Anna Yen

Anna Yen, CFA is an alternative investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about alternative investment topics ranging from derivatives to real estate and cryptocurrencies. Her work has been published on sites like Quicken, the crypto exchange Bybit, and Credit.com.