What is an Alternative Investment?

The investment community definition is broad but labels an alternative investment as virtually everything that is not a traditional publicly-traded investment (e.g., stocks & bonds). 

Non-traditional investments such as commodities, natural resources (e.g., crude oil, timberland, farmland), master limited partnerships, intellectual property, infrastructure and of course, real estate are considered alternative investments. Investments in Hedge Funds, Fund of Funds, Private Equity and Venture Capital are also considered alternative investments. Although the latter would be considered more illiquid and requires a sophisticated investor.

The investment strategies applied vary between the different categories within alternative investments.  The same can be said regarding the level of risk they can carry. However, the investment objective when including this type of asset to an existing portfolio falls under the combination of: improving the portfolio diversification, hedging for inflation, protection on the downside and establishing market exposure.

Like any investment, these require extensive due diligence prior to the initial commitment. The illiquidity premium along with the manager selection process are key decision factors. It is no surprise that the majority of alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature and limited regulations.

For retail investors, real estate is the alternative investment that leads to building wealth efficiently. This can be an effective wealth management strategy. And, given the projected interest rate environment an opportunistic real estate portfolio is likely set to capitalize on potential mispricings and/or distressed real estate opportunities.