Alternative Investments - An Option for Diversification
Alternative investments can offer more options for diversification. But lack of knowledge may be holding some investors back from using them to their full advantage.
High net worth (HNW) investors show high levels of interest in alternative investments - investments that fall outside the traditional categories of stocks, bonds, and mutual funds.
But there is a significant gap between investors’ interest and their ownership of these assets. For example, according to recent Millennium Trust research:
- 63% of HNW investors are moderately or extremely interested in owning real estate investments (exclusive of personal residences)
- But only 37% actually own them
The Knowledge Gap
One reason for this gap may be that HNW investors simply don't know enough about alternative investments. According to the same research:
- 42% of HNW investors have only slight or no familiarity with hedge funds
- 33% have only slight or no familiarity with private equity
- 49% have only slight or no familiarity with other alternatives such as marketplace lending and crowdfunding
An Overview of Alternative Investments
Here are the main types of alternative investments and how they can add value to HNW investors' portfolios:
Investors interested in real estate can choose among:
- Investing directly in properties
- Pooling funds with other investors to purchase a property
- Purchasing shares in a real estate investment trust (REIT)
Real estate has a low correlation with other asset classes, so when the stock market is down, real estate can continue to thrive, making it a valuable diversification tool. For more detailed information on Real Estate investments, you can reference our Guide to Holding Real Estate in Your Retirement Account, FAQs, and our Real Estate Investment Timeline.
A hedge fund is a private pool of capital whose managers can buy or sell basically any asset. Although they resemble mutual funds, hedge funds are not regulated in the same manner and are limited to sophisticated investors, such as institutions and individuals with significant assets. They are popular with experienced investors who have substantial investable assets and are seeking additional returns and diversification.
Private equity resembles hedge funds, but is instead comprised of investments in private companies. Often these investments are in new companies with the potential for substantial growth. New investment platforms are making private equity accessible at lower minimums than was previously the case.
Commodities come in different categories, including:
They tend to have low or negative correlation to traditional equity markets, so when markets are volatile or down, commodities can provide stability. Investors can trade commodity futures or use a managed futures fund.
Marketplace lending is an emerging tool that matches investors with borrowers via online platforms. It can include various types of loans - including consumer, small business and education - as well as real estate deals.
Crowdfunding pools money from individuals to fund new business ventures. It can be debt-based, as with online lending, or equity-based, as with private security offerings. By pooling money, crowdfunding platforms allow individuals to invest at a lower entry point than typical private equity or debt deals.
An Expert Ally
As a directed custodian that specializes in the custody of alternatives, Millennium Trust has the expertise to educate and guide investors through the custody process, after they consider the diversification benefits that alternative investments may offer. Before investing in alternatives, investors should consult their investment, tax and/or legal advisor.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.