Why there is Rush for Alternative Investments?
Raticanta Mandrencar
Year 2007–2008 saw a great financial crisis. It was a great economic disaster. Several investors, individuals as well as financial institutions lost their wealth. Those who had invested their money in the traditional and conventional assets such as: stocks, bonds and cash started looking for something better than the stocks, where they can park their money and make a decent, reliable return. That’s where the alternative investment came into forefront. As of now there is a deep vacuum in identifying the secured alternative investment assets.
It is true that the stock market is not the only place to earn a decent return. But in the absence of other proven alternative assets, that was the only option most of the investors preferred. Subsequently, over the past decade, some alternative investments have become increasingly popular with investors looking to diversify their portfolios. The shift was seen in diversifying the portfolio to include several other assets like REITs, Bonds and Gold. However, the returns on these investments were not attractive. The young and tech savvy investors wanted to have something new, fast and dynamic products and assets generating quick returns on their investments. They were prepared to take greater risk for higher returns and hence, started looking for alternative investment avenues and products around the world.
What are Alternative Investments?
Alternative investments are non-traditional investment asset classes. For individual investors, this might include real estate, commodities or currencies, including gold and bitcoin like cryptocurrencies. For some investors, it might be valuable collectibles, such as works of art, a special car in his garage, precious jewels or collection bottles of fine wine. For institutional investors, it might include hedge funds, private equity and infrastructure.
Alternative investment assets are different from traditional and conventional assets such as stocks, bonds and cash. Financial professionals and advisors always stress a diversified portfolio for successful investing. Without diversity in any investment portfolio, the risk is not evened out and the portfolio tends to be vulnerable during times of financial crisis and economic events. Young and the Neo investors have understood this concept and have started scouting for the assets that could give them steady returns.
Alternative investments has become the sought after trend among the young investors and several asset classes are accessible to a broader range of people that has the potential to bridge the gap between alternative and traditional investment.
Some of the most lucrative of the alternate asset classes are Real Estate, Fine Art, Cryptocurrencies,Venture Capital, Gold, Silver, Wines, Cars etc. Few are process-oriented and restricted to a certain level. However, with Blockchain technology, with smart contracts and tokenization, they are also being streamlined and brought into its fold, so that ordinary investors can own part of these assets in their portfolio.
Real Estate as an Alternative Investment.
The most prominent asset class in one’s portfolio contributing alternative investment is the Real Estate. They are ‘hard assets’ comprising multifamily units or houses. Of course, buying and selling a piece of property takes more effort, time, middle man and commission fees to transact than trade any listed shares.
This Asset of Real Estate can be classified under traditional investment as well as alternative investment due to the introduction of Blockchain technology. That is one of the prime reasons, the Investors are attracted towards parking their funds in the frictionless realty assets such as RealT.co. Real estate has become relatively liquid and market values are fairly transparent. RealT.co is a perfect and very good example, how real estate investment could be fractional, frictionless and smooth with a click of a button.
Fine Art as an Alternative Investment.
In the past, the idea of buying into fine art might have seemed exclusive. We think of valuable art as being worth a great deal of money, such that only wealthy individuals can really buy or trade in it. Of late however, the notion of art investment has taken on new meaning. There are now various platforms that allow ordinary people to
either buy smaller artworks or in some cases essentially purchase shares of more valuable work.
For a novice, to start investing into this asset class, there’s a lot of research that needs to be done. At the same time, it’s advisable to learn how to assess the art market. Understanding this sector will avoid the pitfalls and misleading or the investor to be swayed by curators or others whose top priority is to sell art for the maximum price as much as possible. With due diligence and a reliable trading platform it can be avoided. It is possible to generate a meaningful return via fine art investment.
Venture Capital as an Alternative Investment.
Venture capital investment is another asset that has become more accessible to the investors in recent years. It is somewhat similar to art investment. It’s true that in general, this type of financial deals are happening only between wealthy investors and startup founders. But, now even an average person can invest in startups through so-called “angel groups” or a variety of online platforms. There are platforms like seedrs.com, where one can invest into the startups and ventures by acquiring as little as one share of the company.
Savvy investors do include the portion of their investment in their diversified portfolio. Generally, investors provide the funding for a startup in the hopes of being rewarded by the success of the startup. The reward could be in different forms at different rounds of raising additional funds or at the time of IPO. The best thing could be that you may actually own a piece of that company at a later date and that’s why this investment becomes valuable in time, making it an appealing alternative investment.
Crypto Currencies as an Alternative Investment.
With a wide range of alternative investments, cryptocurrency has become an increasingly popular choice of investment in recent times.The trading in cryptocurrencies is growing too. Several exchanges have sprung up and prominent being Binance, Coinbase, Cex. These exchanges offer trading flexibility along with the hedge offerings. Binance.com offers upto ten times for margin trading. For long term investors, it also provides staking to earn decent returns. The flexibility has made the cryptocurrency an appealing choice of alternative investment, since it offers almost similar benefits that traditional investment provides.
Having dealt with cryptocurrencies and with my own experience I would mention that it is very important to keep it in mind for individual investors to consider a few key principles when investing in cryptocurrencies. You should only invest what you can afford to lose, just like any other alternative investment option. The market is highly speculative unlike stocks. However, there are few reasons that make cryptocurrency a good choice of investment, and why a growing number of people are choosing it as a diversification strategy.
It is believed that the cryptocurrency has a strong future because of the Blockchain technology and the characteristics of cryptocurrencies like Bitcoin. It’s demand and interest in acquiring the coin, it’s use, it’s limited supply, and a high stock to flow ratio similar to gold has made the price of this coin to rise at abnormal heights. The benefits of investment in cryptocurrency is that they are comparatively liquid to many other asset classes in the diversified portfolio.
Precious Metals as an Alternative Investments.
I am passionate about Precious metals and jewellery. Precious metals include Gold, Silver, Palladium and Platinum. You can actually purchase a quantity of whatever asset it is that interests you. Traditional and conventional method was holding them physically and keeping them secured in your vaults or at the bank lockers. However, with tokenization, the process has been simplified and you won’t necessarily need to take physical ownership of it, but a sort of broker or service will hold your metal for you until you wish to sell it. Investors can now invest in these metals easily through platforms such as Bitpanda.com.
Gold Bars or Gold Coins are collectible Assets. Collection of some rare jewellery could fetch high returns. Case in example could be of fancy eye-catching jewellery or the jewellery embedded pieces of stalwart pearls that are hard to find. Out of ten thousand oysters found, one might yield a perl that can become a piece of jewellery. The find of oil has changed the entire landscape and no one is interested in pearl diving any more, risking their lives in the deep blue waters of arabian seas. All the Arabian states have almost stopped pearl diving and natural pears have almost become rare. Most of the pearls found in the market are cultured pearls. Hence, the prices of these natural pearls can go sky high and keep growing. Similarly, rarely found Pink Star diamond or a GIA certified multi cut Solitaire diamond jewellery. These unique gemstones make the collectors items and could be an asset in the investors diversified portfolio.
Collectible Wines/Cars as an Alternative Investments.
As with other alternative investments assets such as gold and farmland, wine is a tangible, physical asset and therefore supply is naturally limited. Only certain geographical locations can grow the grapes in their vineyards, producing the fine wines that interest investors and great vintages only come along very rarely. The wine improves in quality as it ages at the same time, supply actually decreases as more of the wine is consumed. One of the reasons investors are so attracted to wine as an asset are the impressively high returns.
Collectible fine wine prices exhibit a low correlation with stocks as well as higher returns and lower volatility. For these reasons, along with the increasing transparency and liquidity of the wine market, fine wine is gaining credibility among investors as an alternative asset.
Wine is a specialist area that requires a high level of knowledge and the unwary can be caught out by unscrupulous business practices and outright fraud. Without expert knowledge it is very difficult to distinguish between genuine fine wines and fakes and inexperienced investors may get duped.
The investors need not take the physical delivery of the wine. They can leave it with the traders and resell it as and when he gets the better price offer. Alternatively, in case he needs to taste his wine, he can always get it shipped to his place of residence and enjoy the same. The platforms like vinovest.co help you to value your wine collection.
Hard Features of Alternative Investment?
The hardest part of alternative investments is liquidity. With stocks, investors have the advantage of selling their holdings in a daily marketplace of active traders, making it simple to instantly buy, sell and value one’s holdings. Whereas for the alternative investment, there is no exchange house pegging the value of the asset. The value of the investors collectibles is guesstimated using trade publications and previous sales data. The market can swing up and down if a collectible is found to be less rare than originally thought of. These types of alternative assets are traded by investors with a passion and obsession for them beyond the profit motive.
Most other alternative investments come with a huge price tag in the form of Advisory fees or Management fees. However, the advantage is investors are provided with choice of genuine and niche products to select for the investment in their portfolio.
What about Bitcoin? Is it safe to invest in Bitcoin?
You might be wondering, I have not suggested Bitcoin in particular as an alternative investment Asset. Bitcoin, as it stands at present, is a mysterious term. This is my personal opinion. With recent unpredictable ups and downs, it is becoming very hard to consider it as a tradeable asset. Main reason being that it is being portrayed as an alternative to the currency, that it has not been so, in spite of several years and billions of US Dollars locked in its investment. The recent entry of institutional investments bumped its price to almost USD 60k per coin but within a period of 200 days it fell below 50% of that price lingering around USD 30k per coin. This volatility into the cryptocurrency space and in Bitcoin particularly, surely, attracts the attention towards it, but prudent and conservative investors might skip it and look towards alternative coins such as Ethereum or other Alt coins.
At the start of 2020 the news of Covid-19 spread like a wildfire. The economic uncertainty triggered by the pandemic-induced lockdowns and total closure of economic activities across the globe. Most of the investors, who were forced to work from home have now started seeking alternative investments and obviously, the digital assets viz. Cryptocurrencies became fast returns producing assets in their portfolios.
Summary.
Alternative Investments tend to have a higher investment requirement than traditional investments; however, they also have higher returns. Even when the market is on a low, then alternative investments will be more or less unaffected compared to traditional investments and will often manage to “hold their own”. They make a great option for a long-term investment due to the fact that they are likely to remain strong and pull through any financial crisis.
Overall, one should be careful while investing. The traditional and long term stock market investors can do well by staying invested and riding out the inevitable bumps along the way. Yet diversification is essential. A well-balanced portfolio with a healthy mix of equities, fixed income and alternative assets can help quell any stock market nausea and help investors sleep more soundly at night — which is the best return of all.
Raticanta Mandrencar.
*Images courtesy: pexels.com, pixabay.com