What are alternative investments?
Posted on May 25th, 2019
The concept of alternative investments is somewhat diffuse, as it does not present a concrete and well-defined concept within the world of investments. Of course, we will give you the guidelines so that you know clearly what we are referring to.
If you wonder why invest in alternatives, let us fine out.
Best investments are those that seek to exploit inefficiencies found in financial markets through assets and non-traditional investment strategies (such as bonds and shares).
This first definition implies several things. First, that if it is non-traditional investments, the liquidity will not be the same than that of traditional investments. In addition, they are usually assets that almost no one operates in the markets, which are also difficult to obtain or transfer.
In short, we can say that alternative investments are a good option if we want to achieve high profitability. Of course, to achieve this we must assume a high risk or ignorance of how certain assets in the market work.
This is because profitability is offered by assets that are little known, in which they are not invested or that are not as popular as traditional assets (bonds and stocks).
Types of alternative investment:
The different alternative investment funds that we can find are the following:
- Real assets: They are assets that have value due to their historical, property or physical weight. It is the characteristic of real estate, infrastructure, or elements that can be invested and that meets these characteristics.
- Hedge funds: Hedge funds are especially useful for those investors who do not mind getting involved in a high risk. These types of assets try to leverage themselves in speculative investment practices, increasing the risk of investment loss. We must be very careful with this type of alternative investments, because if we do not have enough experience to operate, we may end up losing money.
- Liquid alternatives: Are those assets that seek to provide diversification and protection against the loss of value that is acquired through more liquid assets. They are also risky assets since they present low liquidity compared to other types of investments that can be made.
- Private equity: The concept of private equity is based on indirect investments to companies that try to offer benefits to their investors through the operations that it carries out. That is, investors will invest in a company that is not listed on the market with the hope that in the future the investment will recover it. As we can see, it is a high-risk investment, since we face expectations with reality. If the actions taken by the business go well as it was stated in its objectives, investors will win. However, this added value must be taken care of by investors, since bad practices will generate future mistrust for other projects.