Alternative Investments

An alternative investment is an investment in anything that is not a bond, cash, stock or real estate. So, an alternative investment can be quite a lot of different things, such as: carbon credits, film production, art, stamps, hedge funds, commodities and private equity. In this article, we will be looking more closely at these last 3 types of alternative investment.

Hedge Funds

What hedge fund means today is quite different than what it did back in the mid-20th century. “Hedged funds”, historically, were created to reduce the risk of investment. That is to say, if there were a bear market, your investment would remain, for the most part, unscathed. “Hedged funds” were invented around the time of one of our largest recessions, the great depression, if that helps to clarify their creation.

Nowadays, hedge funds are entirely based on risk. This, in part, has limited their use to a smaller group of investors. These investors are: rich, as the initial minimum investment in a hedge fund is really high, accredited, the US government only allows a certain number of hedge funds, and sophisticated, as the investment strategies are ever changing and evolving. Hedge fund strategies generally fall into 4 categories: directional, relative value, global macro, and event-driven.

Commodities

Commodities can be goods or services. Usually, in an economic sense, they are just goods. Commodities exist due to the want or need of them. The more they are wanted or needed, the higher their value becomes. Sometimes peoples’ wants and needs change, but generally they stay the same. Examples of commonly popular commodities are: crude oil, sugar, aluminum, coffee, coal, rice, salt, tea, and copper, just to name a few.

Commodities can be divided into 2 categories: hard commodities and soft commodities. Hard commodities are extracted through mining, whereas soft commodities are things that can be grown. These raw forms of commodities have a standard price across the world, as it is hard to tell the difference between, let’s say, rice grown in China and rice grown in Jamaica. However, processed commodities, such as cars can vary quite a bit in cost. As a sports car from Italy is going to be different than a car from Latvia.

Private Equity

Generally, companies are put on a public exchange. This means that the general public can invest in them. Private equity is when these companies are taken off of the public exchange because a group of accredited and institutional investors have decided to invest large sums of their own money into them. This generally happens because the company is not doing well, but there is hope seen in it by the investors. Their investment will bring the company back up on it feet and make it marketable again. The investors then sell it and make a lot of money.

Conclusion

As you have seen, alternative investments can come in many different shapes and sizes. Alternative investments’ appeal generally come from the fact that they are not popular. That is to say, they are not a traditional type of investment (they only started to surface in the last century) and something the general population will not, or cannot invest in – either because it is too pricey or too risky. It is the wealthy, sophisticated, accredited investors, as we mentioned earlier, that generally take part in these investments. They enjoy the risk, and can put the money up front. And they do it all for the thrill of making more money. There are other types of alternative investments that aren’t just for these elite few. What about that stamp collection your grandmother gave you? Or, those old comic books, sitting beside them in your closet? You may have some alternative investments yourself.