It’s tempting to diversify your investment strategy with alternative methods, but it’s important to understand the risks associated with these investments.
The Most Common Alternative Investments
“Alternative investment” refers to an investment that is not publicly traded. Some of the most common include private loans, commodities, currency trading, and hedge funds (just to name a few).
Successful investing is (almost) never a matter of “luck,” but of knowledge and good strategy. The more an investor knows about investing, the bolder they will get with these alternative strategies.
Hedge Fund Risks
Hedge funds are one of the most common “alt” methods, but different funds use different strategies. Some do not provide enough diversification to be successful; indeed, many are not “hedged” at all. In order to receive returns that are “better than market,” one must choose the right hedge fund for them.
Leveraged Buyout Pools
Venture capital investment and leveraged buyout pools can be great options for investors looking to diversify. However, for clients with more modest investible monies, liquidity is usually a must-have quality. These options can keep their money locked-up for nearly a decade before they receive any sort of return.
Non-Traded Real Estate and Private Loans
After several banner years, the stock market has leveled off, spurring many to consider alternative investments like private loans or non-traded real estate. Non-traded real estate is always prone to rise or fall with housing prices and the general health of the real estate market.
Precious metals have long been viewed as a “rock-solid” investment (no pun intended), but they fluctuate wildly. While their value rises greatly in uncertain times (political upheaval, natural disasters, etc.), the value is not tied to stocks and more stable methods of determining value.
With private loans, the investor must always be aware of the risk that these loans will be defaulted on. These risks must be assessed on an individual-by-individual basis to ensure the investor loans out only an amount that they could comfortably lose.
Do Your Research
More and more people are seeking out various “alts,” unfortunately, many without understanding these risks. This means it’s unlikely that they’ll be able to maximize profits and minimize losses. For one thing, this means determining whether they’ve got a stable investment or are merely in the middle of a bubble about to burst, but as we’ve shown above, there are discrete risks tied to each non-traded investment.
Clearly, investors and investment advisers alike have a lot of research to do when choosing their individual strategies