What are alternative investments? Your ultimate list

Woman researching alternative investments to generate passive income outside of the stock market from her laptop

What are alternative investments?

If you’ve found yourself asking, “What are alternative investments?” we’ve got the answer you’re looking for. There’s a whole world of investment options that exist beyond the stock market. Our ultimate list is here to uncover them for you. In this article, we’ll break down the potential benefits of alternative investments, how they differ from traditional asset classes and give you an extensive list of alternative investments, you can start exploring today. Let’s take a look at what alternative investments actually are.

Alternative investments, also known as “alternatives” or “alts” are generally considered to be any investments made in asset classes other than stocks, bonds, and cash. There is a robust list of alternative investments to choose from, ranging anywhere from tangible assets like art and precious metals to financial assets like venture capital and real estate investing. Alternative investments aren’t traded on public markets like Dow Jones or NASDAQ, instead, they’ve traditionally been invested through more exclusive channels like hedge funds, wealth management firms, and accredited investors with high net worth

How are alternative investments different than investing in the stock market?

Since alternative investments are not traded on public markets, there tends to be less transparency around pricing as well as less liquidity. For example, it’s easy to find out how well Amazon stock is doing, but it’s not as easy to see how well niche assets like farmland are doing. In the same vein, it’s easier to sell 5,000 shares of Amazon stock than it is to sell 5,000 acres of farmland. However, this isn’t necessarily a bad thing. In fact, because alternative investments typically don’t fluctuate in tandem with the market, they’re usually unaffected by declining traditional market values. 

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What are the potential benefits of alternative investments?

Alternative investments can be a good way to diversify your portfolio and help reduce your exposure to the stock market. However, a low-risk list of alternative investments like antiques, wine, and coins, just to name a few, are unlikely to make or lose much money, thus creating an opportunity to generate passive income. (Which never hurts!) 

Another notable potential benefit of alternative investments is your ability to invest using retirement accounts like your IRA, which are tax-efficient. Although there are some investments that are off-limits for retirement accounts, the list of alternative investments allowed is still fairly robust.

But the benefits of alternative investments can go even deeper than just building wealth. By allocating some of your money to more niche projects like startups or film, you can feel good knowing you’re contributing to a cause you actually care about.

Woman walking through an art gallery meant to highlight alterntive investment opportunities in art finance

What should you know about alternative investing before you start?

Generating higher returns typically comes with higher risks —as is the case with alternative investments. That’s why if you’re considering multiple options from a list of alternative investments, you and your investment advisor must perform due diligence to find out which options are right for you. This is especially true given that the performance of alternative investments is non-public information, which can sometimes make good intel harder to find.

The truth is that there will always be risk involved, so it’s important to consider key aspects before investing and to be honest about your comfort zone. Ask questions like, am I able to afford these recurring fees? And how easily can I tap into money when I need it? Once you’re satisfied with the answers to these questions, you can feel confident adding alternative investments to your portfolio. 

What investment strategies can be used while making alternative investments?

Not all investments were created equal. Different investments might provide different value to your portfolio. However, in general terms, you can think of alternative investments as falling into one of three categories:

  1. Income – These are investments that give you a cash-on-cash return. An example of an income investment would be to purchase a franchise. 
  2. Growth – This is investing in goods or commodities that do not produce income but could potentially have a large price appreciation. An example of a growth investment might be art, fine wine, coins or gold.
  3. Balance – These investments provide both income and growth. An example of a balanced investment strategy might be to purchase a property that you then rent out to get income and stand to also gain from its growth because of home price appreciation.

Who are alternative investments right for?

In the past, alternative investments were only “right” for individuals with a high net worth or income. Historically, they were the only ones who could be accredited investors. But today, alternative investments can be right for a wider group of investors. Progressive legislation like the Fair Investment Opportunities for Professional Experts Act has expanded the criteria for accredited investors beyond just income and net worth. The SEC opened the gates to people based on financial knowledge and experience. Not only does this allow certain experts to become accredited investors, but it also protects those who aren’t from financial loss.

What are the types of alternative investments?

Now that we’ve answered “what are alternative investments?” it’s time to talk about what types of alternative investments exist.  Although this is by no means an exhaustive list of alternative investments, our list covers some of the most well-known options. If you’re seriously considering investing in alternatives, it’s a good idea to start researching now to find the investments right for you.

Photos of modern suburban houses showing real estate investment opportunities outside of the stock market

Real Estate

Real estate is probably one of the most well-known and appealing alternative investments. Why? It appreciates over time. Although this means bigger ROI when it comes time to sell, there is no “one size fits all” for achieving appreciation. Different property types have different sources of appreciation. For example, if you invest in a residential property, and the neighborhood continues to grow and flourish, its value will climb. Conversely, if the neighborhood decays, its value will decrease. For this reason, it’s important to understand the difference between real estate asset classes and property types to ensure you’re making a worthwhile investment. 

The market size of the Real Estate Sales & Brokerage industry in the US in 2020 is $166.9bn.  Real estate is also considered an investment that is inflation protected, or an inflation hedge, making it an investment that can help diversify your portfolio. There are also tax benefits to buying real estate, and fix and flip has been a viable strategy for income generation. Getting involved in real estate development and building is also an investment option. 

SEE ALSO: What are single-family rentals in real estate?

Private Mortgages

If you’re looking for a lower-risk option that has potentially attractive yields, private mortgages can be a viable alternative investment. This is essentially a loan provided to a real estate owner over a 1-5 year contract. This type of alternative investment is considered low risk since loans are made at no more than 60-70% of the market value of the property. Not to mention, since this investment is backed by real estate, the risk is low if the borrower defaults on the loan. However, this doesn’t mean the investment shouldn’t be vetted. If you’re interested in private mortgages, make sure you have someone in your corner who you can trust to read the fine print and raise any red flags.

Tax Liens

Also under the real estate umbrella are tax liens. Here’s how it works: If a property owner fails to pay their taxes, their municipality can sell their tax liens to be paid off as well as the right to foreclose. Tax liens will often be auctioned off for investors to take their pick. Investors will then pay off the taxes, automatically acquiring the right to be paid back with interest from the property owner. Interest rates vary depending on state and jurisdiction, but one thing’s for sure—if you’re considering tax liens as an alternative investment, due diligence is a must. If the property forecloses, the tax lien holder is the next in line to seize the assets. Before you get excited though, you’ll want to verify the lien, count the cost of all potential fees, and make sure the property is in good condition so you can guarantee solid returns. 

Private Company Equity

Another alternative investment to consider is private company equity. Not only is there typically less competition to buy equity from a private company than a public company, but private companies are also usually smaller, allowing investors to get more involved in the business and its people that a public company would. In a similar way, investors in private companies are more likely to be significant investors early-on, thus, influencing decisions and potentially producing greater returns in the long run. The downside? These companies aren’t held to the same transparency standards as public companies. Before investing, make sure you research your target company’s performance and financials thoroughly.

Structured Settlements

Another alternative investment is a structured settlement or a financial agreement settled for a plaintiff in a personal injury claim or similar lawsuit. Payment plans in structured settlements can vary on a case by case basis. For example, some may require a lump sum upfront, where others require smaller amounts over a long period of time. People use this as an alternative investment by paying for some or all of the structured settlements to gain a share of the premiums. Investors in structured settlements can gain peace of mind knowing their payments are guaranteed by court-ordered contracts and highly regulated insurance companies. By the same token, investors are completely dependent on the payment schedule, making illiquidity a concern if the need arises to sell long-term holdings.

Farmland maintained by red tractor showing another unique alternative investment opportunity to generate passive income

Farmland

Another unique alternative investment is farmland. Similar to real estate, the potential upside to purchasing farmland is appreciation. However, you can also lease or sharecrop your farmland to make a profit. Since this is more of a niche investment, you’ll want to work with a real estate professional who specializes in farm and ranch properties. You’ll also want to think about whether or not you’re willing to take on a long-term project—most farmland investors wait at least 5 or so years before they start seeing potential.

Equipment Leasing

Equipment leasing funds are pooled alternative investments. This means you’ll pool your money into a portfolio of capital equipment with other investors that are then leased to companies. The kinds of equipment could range anywhere from construction machinery to medical supplies, but it’s ultimately the sponsor of the fund who makes the decisions. Equipment leasing funds typically run for 7-10 years until the equipment depreciates and is sold off. Equipment leasing tends to be a bit riskier since you have virtually no say in which equipment your sponsor will choose. You also run the risk of equipment becoming damaged or sitting idle. For this reason, we recommend doing your homework on your sponsor and making sure they have a good track record.

Oil and Gas LPs

Oil and gas producers are faced with constant pressure to grow production, and how they grow production is largely through investors. There are four types of investments you can make with oil and gas LPs: exploration, developing, income, and services and support. This alternative investment can be appealing for both portfolio diversification and tax breaks. However, these are also particularly volatile alternatives. If you invest, be prepared to pass through both losses and gains and have a high tolerance for risk. 

Artwork and Collectibles

Artwork and collectibles are an alternative investment that requires a lot of market knowledge and patience. The key to investing in artwork and collectibles is correctly predicting if and how they might grow in value over time. Since it’s hard to judge demand and appeal 20-50 years down the line, this investment is a shot in the dark if you don’t know what you’re doing. Between counterfeiting and basic wear and tear, artwork and collectibles are very illiquid and likely to lose value, so if you’re going to invest, make sure what you’re buying is something you’ll cherish forever.

If you’re not looking to purchase art yourself, art finance, through an investing platform such as Yieldstreet, is another alternative

A cargo ship on the ocean at sunset meant to highlight marine finance, another alternative asset class

Timberland 

Another alternative investment is timberland, or investing in forest growth. By putting your money towards timberland, you contribute to better site conditions and tree management, and in return, you get a profit when trees are harvested. Timberland has the potential to be a solid investment because the demand for timber is not expected to disappear, and it has no direct correlation with the market. Not to mention, historically the volume of trees grows every year which offers the potential for steady appreciation over time. 

Private Equity

Private equity (PE) is an excellent alternative investment for those who want to have a highly involved role in changing a company for the better. The purpose of private equity is to invest growth capital into new businesses and help them restructure to accelerate growth. Investing in private equity truly only makes sense for those with a greater net worth and income since it requires acquiring a company. However, it’s common for people to band together and invest as a group. Generally speaking, once the target company is acquired, the business is restructured to maximize profitability, and then put on the market to be sold.

Venture Capital

Another alternative investment is venture capital (VC), or pledging an investment to a smaller company that has long-term potential in exchange for equity. Venture capital is a subset of private equity and has a similar transformative aspect. The major difference between the two is that venture capitalists are along for the long haul, where those in private equity tend to buy and sell more quickly. Venture capitalists are also typically wealthy individuals or institutions that carefully monitor their company’s progress, determine when they’ll release different rounds of funding, and eventually leave after a merger, acquisition, or IPO.

Hedge Funds

A hedge fund is one of the more sophisticated alternative investments. Here’s how it works: Accredited investors pool their money together and give it to a hedge fund, the hedge fund then uses different investment strategies to absorb losses and generate high returns for their investors. Hedge funds are essentially a vehicle you can use to invest in any of the areas you’ll find on this list—the difference? You have professionals who’ve already done the research and have a better idea of what investments will succeed. One thing to be aware of is that some hedge funds are blind pools, meaning you don’t know what your money’s being put into. This lack of transparency is something to consider when choosing a hedge fund. Remember to read the fine print and be honest about your comfort levels.

 Fund of Funds

A fund of funds is a lot like what it sounds like—a fund that invests in other hedge funds, private equity funds, mutual funds, and investment funds to generate returns. This alternative investment gives people access to funds they wouldn’t otherwise have due to high minimum investment amounts that only a small percent can usually afford. By investing in a fund of funds, you’re entrusting that team to make the right decisions about what other funds can offer you. The major criticism of these types of funds is that it’s difficult to pick the right fund managers since past performance is not an indicator of future success.

Commodities

Commodities are tangible assets used to create consumer products like metals, crops, livestock, and more. There are also “soft commodities” that cannot be stored for long periods of time like cotton, sugar cane, and coffee. Investors can buy and sell commodities directly on the stock market or via derivatives such as futures and options. Commodities are another great alternative investment because they’re one of the few asset classes that actually benefit from inflation. As demands for commodities increase, naturally so do their prices which helps hedge against inflation. 

Trade Finance

Trade finance deals with financing cross-border transactions of materials in transit. A typical trade finance loan provides funding to the exporter and is secured by the collateral being exported, which may be commodities or goods. Once the sale is realized, which typically occurs upon the importer taking possession of the materials, a receivable is generated whereby the importer is obligated to pay the exporter for the materials. This receivable then becomes the collateral securing the loan and typically requires the importer to pay within a short duration. Once the receivable is paid, the trade finance loan is subsequently repaid. It’s important to note that Trade finance offers a variety of financing options designed to facilitate commercial trade while helping to mitigate risk.

Marine finance

Marine finance is financing the construction, scrapping, and/or acquisition of vessels like boats and ships. It’s important to do your research on originators to make sure they have adequate experience in the industry and have navigated many ups and downs in the market. This is especially true since marine finance is highly correlated to market trends. This correlation is due to any downturn in the global economy or a rise in tariffs, which ultimately slows the shipping industry. Although this is a risk worth considering, marine finance is still a potentially exciting alternative investment opportunity

Litigation funding

Litigation funding is paying for some or all of the costs associated with a litigation in return for a share of the proceeds if it is successful. There are two main groups you can fund litigation for: consumers and companies. Consumer financing is typically dedicated towards pre-settlement advances which are generally smaller amounts. Company or commercial financing, on the other hand, is dedicated towards attorney fees and litigation costs which are significantly bigger bills. The obvious downside to this alternative investment is the losses you face if your third-party loses the dispute. For this reason, unless working with a consumer or commercial financing firm, individuals typically opt to crowdfund litigation with hundreds or even thousands of other individuals.

Film reels and investing in a film's success can be considered an alternative investment as it's outside of the stock market

Film

Film, or investing in the success of a movie is another alternative investment. Although this has a certain star-studded allure, it’s a risky undertaking. From production costs to scouting the right talent, there are so many factors that go into making a successful film. You also have to ask yourself is the film meant for a niche or the mass audience? If the scope of its audience is limited, it might fall flat. It’s a good idea to entrust your investment to a private equity fund or hedge fund. Regardless of your methods, make sure to do your due diligence to gauge your potential for return. 

Aviation

Aviation is another noteworthy alternative investment. From commercial aircraft to civil aircraft, there is an ever-increasing demand for air travel that has stood the test of time. For this reason, investing in aircraft leasing or debt opportunities has the potential to be very favorable. In addition, aircraft typically have a long life-span of 20-25 years, which means you have a tangible asset in your corner. However, like most other tangible assets, it depreciates over time. If you want to invest in aviation, we recommend working with a professional from a fund. It’s impractical to purchase an aircraft on your own (even for the mega-rich!) and the relevant funds will have direct experience with airlines in the industry and understand regulations and maintenance.

Franchise

Franchises can be an ideal alternative investment for those who want to contribute to the success of a company, with the comfort of an already proven business model. You’re likely familiar with some of the U.S.’s biggest franchises: McDonald’s, Dunkin’ Donuts, Taco Bell, just to name a few. Those who want to invest in a franchise will benefit from instant brand recognition with the goal of becoming an established player in the market. However, this is by no means a passive investment. Although these names are corporate giants, each individual franchisee manages their own operations. With every investment there is risk, and the profitability of your investment is dependent on your franchise’s continued success. However, if you can sell it at a substantial gain, there is the potential for a major pay off.

Aeroplane about to take off meant to showcase how aviation can be considered as an alternative asset class

Distressed Debt 

Distressed debt is the act of buying-up a failing company’s debt in hopes of turning it around to make a profit. This alternative investment is usually made by hedge funds or private equity funds due to the monumental costs that accrue for a failing company. Afraid they won’t be able to pay back their debt, they will promise lenders a profit. However, that profit only comes if the company is actually able to pay you back. For example, let’s say a company gives you the right to $100 for your $70 payment. If they’re able to pay off their debts, you will get paid back $100 for a $30 profit. Given these companies are usually those on the brink of bankruptcy, the debt tends to be much higher than that, thus, the returns tend to be much higher as well. 

Intellectual Property

Intellectual property is any intangible creation such as inventions, artistic works, names and images. Intellectual property is a unique alternative investment because its value can increase indefinitely. It often represents a crucial financial asset for companies in booming industries like technology, medicine, and entertainment. A common investment angle for intellectual property is “brand investing” or seeking out companies that have attractive brands. Your goal is to find the next Starbucks or Nike that will take off. Intellectual property can be an extremely valuable investment opportunity, but you’ll want to leave the due diligence to the professionals like venture capital funds.

Mezzanine Debt

Mezzanine debt is a hybrid of both equity and debt financing, so investors have a unique protection from the downside but also an opportunity to participate in the upside. A simplified example is you loan a company $100 for debt and in return, they give you $10 worth of equity. Companies often use mezzanine debt to help support a major project or acquisition, so they look to PE funds and hedge funds to help. It sits at the bottom of the capital structure, so it gets paid off last in bankruptcy — therefore, it’s riskier, but also one of the alternative investments with higher returns. 

Liquid Alternatives

Liquid alternatives, or “liquid alts” are (you guessed it!) more liquid alternative investments than the other alts discussed here. These alternatives are essentially mutual funds or exchange-traded funds (ETFs) that go against the grain when it comes to the illiquidity you typically find in alternatives. How? These funds employ different strategies to make alternative investments that can be bought and sold daily as opposed to quarterly. Although the ability to easily sell liquid alternatives is appealing, it’s wise to have discipline in preserving some alternatives. Since this is an alternative that is closely correlated to market performance, you need to be careful to hedge any volatility.

Structured Notes

Structured notes are hybrid securities that combine bonds, as well as additional investments. The goal of this alternative is to provide the advantages of both debt assets and investment assets. It’s important to note that structured notes are not direct investments, but instead are derivatives. Derivatives being financial instruments stemming from a third asset or transaction. Typically, structured notes can be very risky to the average investor so, as with all of the above alts, it’s best to consult your financial advisor before investing. 

We hope the next time someone asks, “what are alternative investments?” you’ll be able to answer like a pro. Alternative investments can be a great way to expand your financial horizons and encourage a diversified portfolio. 

Interested in investing in alternatives such as marine finance, art finance, real estate, and litigation? Yieldstreet can help, see how

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