An alternative asset is a newer type of asset that has not been traditionally considered part of an investment portfolio. Historically, examples include real estate, commodities, as well as rare coins and stamps, artwork or trading cards. More recently, the term has also come to be used to refer to other institutional asset classes including private equity, venture capital, trading strategy indices, and hedge funds. Due to the nature of these assets, an accurate valuation is sometimes difficult to accomplish.
Alternative assets are generally viewed as less liquid than regular assets. For example, most artwork, sports cards, and stamps gain the majority of their value over a long period of time. Other alternative assets, such as investments in infrastructure-related projects, may take decades to gain significant value. Therefore, investors considering alternative assets are generally investing far into the future.
The main advantage of alternative assets is that they help diversify an investor's portfolio. Since they are non-traditional investments, they do not tend to move in the direction of the stock market and may, therefore, help a portfolio sustain market volatility. Also, due to lower liquidity, alternative assets are often mispriced and so offer opportunities for arbitrage.
Due to its non-traditional nature, alternative assets are more difficult to add to a portfolio. Therefore, banks may charge an additional fee for holding the asset. Furthermore, depending on the returns realized from the asset, additional tax forms may have to be filed. Its lack of liquidity is also seen as a major disadvantage since liquidating, as well as properly valuing, the asset may take some time.