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The Alternative Investment Universe

An alternative is an investment product other than public stocks, high-quality bonds, money markets, and residential real estate. Alternatives include financial assets such as private equityventure capitalhedge funds, commodities, and financial derivatives. It also includes tangible assets like precious metals, natural resources, commercial and industrial real estate, valuable art and antiques, collectibles (coins and stamps, for example), etc.

In the next decade, partly as a result of the JOBS Act of 2012—but also because of economic and demographic shifts—private equity and venture capital will become a more prominent part of the alternatives landscape for accredited investors.

Diversification
Alternatives are often used by accredited investors as a diversification strategy. The downside of alternatives, at least in the estimation of less sophisticated investors, is that they tend to be relatively illiquid, the minimum investment may be steep, it may be difficult to determine the market value of the asset, and there may be limited historical risk and return data, among other perceived risks. Thus alternative investments are held mainly by institutional and accredited investors.

A 2006 NACUBO study of university endowments in the USA with more than $1 billion in assets found that just over 40 percent of funds were allocated to alternatives, mainly hedge funds, PE, VC, real estate, and natural resources. [Source: Raymond James] That might be too high for many individual accredited investors, but more and more family offices are devoting higher allocations to alternatives (some as much as 50 percent), based on our anecdotal observations.

© 2013 DailyDAC, LLC. Written by Dave Freedman, financial and legal journalist. Updated 9/3/13.

 

 

 

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