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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. Investments in real estate and forestry are also often termed alternative despite the ancient use of such real assets to enhance and preserve wealth. Alternative investments are to be contrasted with traditional investments.
There is a wide variety of literature on alternative investments; however, this term has been used broadly and can also be used to refer to financial alternatives such as derivatives or other alternatives such as energy. It is difficult to find research on the investment characteristics of tangible alternatives such as art or wine due primarily to a lack of good quality data. The Goizueta Business School at Emory University has established the Emory Center for Alternative Investments to provide research and a forum for discussion regarding private equity, hedge fund, and venture capital investments.
The Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, based on 2002 data, showed high-net-worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007, this had reduced to 9%. No recommendations were made in either report about the amount of money investors should place in alternative investments.
Alternative investments are sometimes used as a way of reducing overall investment risk through diversification.
Some of the characteristics of alternative investments may include:
- Low correlation with traditional financial investments such as stocks and bonds
- It may be difficult to determine the current market value of the asset
- Alternative investments may be relatively illiquid (see "Liquid alts")
- 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
Liquid alternatives ("alts") are alternative investments that provide daily liquidity. Liquid alternative investments should produce returns uncorrelated to GDP growth, must have protection against systemic market risk and should be too small to create new systemic risks for the market.
There has been expressed skepticism over the complexity of liquid alts and the lack of able portfolio managers.
- Liquid Alternative Investment
- Real estate fund
- Chartered Alternative Investment Analyst
- Philatelic investment
- Traditional investments
- Platinum as an investment
- Gold as an investment
- Palladium as an investment
- Silver as an investment
- Precious metals as an alternative investment
- First class returns for alternative investments by John Greenwood The Telegraph, 6 October 2008. Retrieved 29 October 2011. Archived here.
- CER's as investment
- Investing In The Big Screen Can Be A Profitable Story by Shelly Schwartz CNBC, 18 October 2010. Retrieved 29 October 2011. Archived here.
- Invest in a forest, The Telegraph, 25 Aug 2007. Retrieved 14 September 2013. Archived here.
- Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, p.12. Retrieved 28 March 2010.
- Cap Gemini Merrill Lynch World Wealth Report 2008, p.14. Retrieved 28 March 2010.
- Defining liquid alternatives
- Some question the value of liquid-alts mutual funds
- H. Kent Baker and Greg Filbeck (2013). Alternative Investments: Instruments, Performance, Benchmarks and Strategies. John Wiley & Sons. ISBN 978-1-118-24112-7.
- David M. Weiss (2009). Financial Instruments: Equities, Debt, Derivatives and Alternative Investments. Portfolio. ISBN 1-59184-227-1.
- Portfolio Diversification benefits of Investing in Stamps by Chris Veld, University of Stirling. (Incomplete first draft)