THE BASICS on ALTERNATIVE INVESTMENTS
In the last few years, marketing to private investors of Alternative Investments has increased, especially in Real Estate Investment Trusts (REITs), Business Development Companies, Pipelines, and Oil & Gas Development. Having at least a basic understanding of an Alternative Investment is important for investors.
Investopedia defines an Alternative Investment as: “An alternative investment is an investment in asset classes other than stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as a Real Estate Fund, commodities, private equity, distressed securities, hedge funds, carbon credits, venture capital, film production and financial derivatives.“
Wikipedia defines the characteristics as: “Alternative investments are sometimes used as a tool to reduce overall investment risk through diversification. Some of the characteristics of alternative investments may include:
- Low correlation with traditional financial investments
- It may be difficult to determine the current market value of the asset
- Alternative investments may be relatively illiquid
- Costs of purchase and sale may be relatively high
- There may be limited historical risk and return data
- A high degree of investment analysis may be required before buying
Several institutional funds such as pensions and private endowments to allocate a small portion of their portfolios to alternative investments, typically less than 10%.
Private investors should consult their financial advisor regarding their suitability for alternative investments.
Alternative investments involve special risks such as leveraging the investment, potential adverse market forces, and regulatory changes. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com