Alternative Investments: What Are They and Types Explained
Written by
John Csiszar
Edited by
Melanie Grafil
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Key Takeaways
- Investors may want to get more creative as economic risk factors like inflation, interest rate hikes, etc., stack up.
- Because of a low correlation to traditional markets, alternative investments can help diversify your portfolio and safeguard your investments.
- Some of the best types of alternative investments include REITs, art and private equity.
- Carefully analyze your finances so you can pick the alternative investment with the right combination of risk and reward based on your goals.
A quick look at the recommended alternative investment partners:
- Private Equity REITs: CrowdStreet
- Fractional Shares of Rental Property: Arrived Homes
- Contemporary Art: Masterworks
- Wine: Vinovest
- Pre-IPO Private Equity Securities: Linqto
While stocks and bonds are the most common ways to invest, modern investors are looking to alternative investments as a means of diversification. Thanks to advancements in the investing world, accessing these different classes is now easier than ever.
What Are Alternative Investments?
Alternative investments such as cryptocurrencies, real estate, contemporary art and wine can help to diversify your portfolio and therefore provide some safeguards to your investments. Many types of alternative investments have a low correlation with traditional markets, making them great for diversification.
Before you invest, make sure you think about these factors:
- Goals: Are you trying to secure your retirement funds? Perhaps you want to earn more to buy a vacation home? You should clearly define your goals at the beginning of the process to help define everything that follows.
- Your personal risk tolerance: Should you aim for slow, steady growth or a riskier option with a chance for higher returns?
- The timeline for your investment: Are you hoping to access your returns in one year, 30 years or something in between?
- Investment knowledge: It’s important to know and understand what you are investing in and any associated risks.
Considering these factors will help you make an informed decision about which type of alternative investment is best for you based on the potential risks and rewards.
Types of Alternative Investments
While this isn’t an exhaustive list of alternative investments, it offers a broad overview of the options available to investors. Here’s a quick look at what they are, why you might need them in your portfolio and what benefits and risks may be involved.
1. Private Equity REITs
- What it is: A Real Estate Investment Trust is a company that owns income-producing residential or commercial real estate, or both.
- Why you need it: REITs historically have been considered good investments due to steady dividend income and long-term appreciation on the value of the real estate.
- Recommended partner: Crowdstreet
Private equity REITs are a way to gain exposure to the real estate market without having to be an expert yourself. Rather than having to analyze and pick a specific property, professional managers do all the legwork for you, investing in a portfolio of real estate that can provide you with income and/or capital appreciation. Another benefit of private equity REITs is that you can own a diversified portfolio of properties rather than having all your eggs in one basket. On the downside, unlike publicly traded REITs, their private equity counterparts are not as liquid or as transparent in terms of what you actually own.
Crowdstreet
Why it stands out: CrowdStreet offers investors access to growth-focused private commercial real estate projects with average holding periods of five to seven years.
Pros:
- Free sign-up for those who qualify
- A variety of deals to choose from, including multifamily, self-storage and data centers
- Sponsors who bring commercial deals to CrowdStreet’s marketplace are carefully vetted
- Average internal rate of return of 18.1%
Cons:
- Serves only accredited investors, which eliminates those who don’t have a certain level of income or wealth
- High minimum investment of $25,000
What to know: CrowdStreet allows you to choose how you want to invest. You can invest in a diversified fund, directly in an individual deal or build a portfolio of your own.
2. Fractional Shares of Rental Property
- What it is: Purchasing fractional shares of rental property allows you to invest in rental real estate without owning it outright or becoming a full-blown landlord.
- Why you need it: You can spread risk across multiple properties for much less than the cost of purchasing entire homes, there’s no work involved and you get passive quarterly dividend payments.
- Recommended partner: Arrived Homes
As it can be costly to enter the real estate market on your own, buying fractional shares of rental property can be a great way to dip your toe into the market and earn some regular income. While buying even a single-unit rental property may require tens or even hundreds of thousands of dollars to get started, you can buy fractional shares of rental property for as little as $100 with Arrived Homes. The downside of investing like this is that you don’t have total control of your investment, as you would if you bought your own entire property. You also may pay more in fees, as there’s an added layer of professional management between you and your property.
Arrived Homes
Why it stands out: There are very few restrictions if you want to invest with Arrived. The platform is open to all U.S. citizens or residents above the age of 18, and you don’t need to be an accredited investor to participate. In fact, you can start investing with as little as $100.
Pros:
- Low minimum investment
- Steady returns that historically range from 6% to 10% annually for single-family residential
- Passive income with no operational responsibility
Cons:
- Minimum hold period of 5-7 years
- Small selection of available properties
What to know: The platform is best for long-term investors who prefer steady returns over big gains. You’ll have to make a commitment of at least five years, and your return might be lower than with stocks or other investment vehicles.
3. Contemporary Art
- What it is: The ability to purchase shares of iconic pieces of art allows investors to enter the art market at a much lower price point than ever before.
- Why you need it: One of the main benefits of investing in art is that it isn’t correlated with other types of investments. For example, the art market isn’t affected by a stock market crash because it has its own supply and demand.
- Our recommended partner: Masterworks
Fractional share investing has moved beyond stocks and real estate and into the art world. While a $10 million contemporary art masterpiece is too expensive for most investors, you can now combine your money with others and own a portion of great artwork. The contemporary art market can move in fits and starts. From 1995 through 2020, for example, it returned an average of 14% per year, well above the 9.5% return of the S&P 500. One of the main risks of investing in fractional shares of contemporary art is that it’s relatively new and doesn’t have an established trading exchange. As with other types of alternative investments, this can make trading more illiquid. The art world in general can also be hard to price efficiently, meaning it can be hard to determine the real value of an artwork until it’s actually sold.
Masterworks
Why it stands out: Masterworks is the first investment platform dedicated to art investing. It allows everyday investors to own shares of iconic works of art by the likes of Pablo Picasso, Banksy, Andy Warhol and more.
Pros:
- Gives you access to contemporary art , which appreciated by 14.1% annually on average from 1995-2021
- Option to hold your investment or sell shares on secondary market
Cons:
- Selling shares depends on buyers in secondary market
- Typically a longer term holding period (3 -10 years)
What to know: All artwork available on the Masterworks platform has been expertly vetted and curated by its industry-leading research team, so a lot of the legwork that comes along with traditional art investing is done for you.
4. Wine
- What it is: Buying wine can be an excellent way to diversify your investments, as long as you have the knowledge or rely on experts to select the right bottles.
- Why you need it: Collectables like fine wine generally deliver steady returns instead of the boom and bust cycles of stocks and bonds.
- Recommended partner: Vinovest
Wine is a physical, tangible asset that can be enjoyed for its beauty and taste. Many fine wine investors also enjoy the history behind a good bottle. Overall, the wine market can be a great way to diversify a traditional investment portfolio made up mostly of stocks and bonds. If you select the right bottles, it can also be highly profitable. However, the risk of investing in wine is that you must pick the right bottles and vintages to make real money. While some bottles can reach stratospheric levels, other investments in wine might show little-to-no return. Just like investing in real estate, stocks, or contemporary art, you’ll need good insight and knowledge to make the best investment. Unlike financial assets, investing in wine also carries the risk of the loss of your entire investment through breakage or spoilage. These are just some of the reasons why it can be a good idea to invest in wine through a platform like Vinovest.
Vinovest
Why it stands out: Vinovest offers a chance for wine and now whiskey lovers to invest in their favorite liquid asset. The company’s platform allows investors to buy bottles based on individual profiles and risk tolerances.
Pros:
- Low minimum investment
- Proprietary algorithms designed to maximize returns
- Master Sommeliers advise on the best wines to choose
- Buying power that helps lower prices for individual bottles
Cons:
- Management fees charged for storage
- 3% early liquidation penalty assessed for withdrawing funds within three years of the initial purchase
- Can take a long time to see a return
What to know: According to Vinovest, only 1% of the wine sold at grocery stores is investment-grade because most wines don’t have a built-to-age structure.
5. Pre-IPO Private Equity Securities
- What it is: Pre-IPO Private Equity Securities allow you to own shares of startups without joining an investment or venture capital firm.
- Why you need it: If you’re willing to take on more risk tolerance, the possible rewards of investing in companies at this stage are much higher.
- Recommended partner: Linqto
Pre-IPO private equity securities are the ultimate “boom or bust” investments. If you get in early on a company that’s going to be the next Microsoft, even a small investment could turn you into a millionaire. But others may wipe out your entire investment. This is why, traditionally, these types of investments were only available to so-called “accredited investors,” or those with knowledge and experience in the market in addition to having a high income and/or net worth. But new investment platforms like Linqto have opened up this world to average investors. Just be aware of the risk of capital loss that you could be taking on by investing in pre-IPO private equity securities.
Linqto
Why it stands out: Linqto aims to make it as easy as possible for wealthy investors to buy shares of private startups that could be future unicorns. The company’s platform lets users invest for as little as $10,000.
Pros:
- Minimum investment of $10,000 is much lower than what you’ll find at many investment firms
- No added fees or hidden costs
- Comprehensive information on listed companies, including valuations, risks and financial data
Cons:
- Must be an accredited investor to create an account
- Limited number of companies to invest in
What to know: In addition to investing as an individual, you also have the option of investing as an LLC, trust or other entity at Linqto.
FAQ
- What are examples of alternative investments?
- According to the CFA Institute, alternative investments are grouped into five main categories: hedge funds, private capital, natural resources, real estate and infrastructure. Within these broad categories are a wide range of individual investments, from hedge funds and commodities to timberland, real estate, fine art, wine or whiskey, classic cars and so on.
- Are alternative investments high risk?
- According to the largest bank in the country, JPMorgan Chase, alternative investments generally do carry a greater degree of risk than traditional investments. Alternative investments are harder to buy and sell than traditional investments, and there usually isn't as much information about them as you might get from, say, the quarterly and annual reports that must be published by publicly traded companies.
- What is the difference between alternative and traditional investment?
- There are different ways to define alternative and traditional investments. Generally, alternative investments are not available on a publicly traded exchange, although there are some exceptions like commodities. They are typically not liquid, meaning it can be harder to convert them to cash, and they are often not regulated by the SEC or other regulatory agencies. Harvard Business School breaks down the distinction into even simpler terms, stating that an alternative investment is any investment that is not a stock, bond or cash.
- Is real estate a good alternative investment?
- For the right investor, real estate can be a great alternative investment. Real estate offers the potential for both capital appreciation and cash flow, depending on the type of property you choose, and it can also offer a variety of tax breaks. Real estate can also be a great way to diversify as well, as it is not highly correlated with price movements in the stock and bond markets. It's worth noting, however, that real estate also has its share of drawbacks. For example, real property is highly illiquid when compared with stocks and bonds. It can take days, weeks, months or even years to unload a property, whereas stocks and bonds can be sold in an instant any time the markets are open.
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- MarketWatch. 2024. "The Largest Banks in the U.S."
- Time. 2024. "8 Alternative Investments to Diversify Your Portfolio in 2024."
