What Are Alternative Investments?

precious metal gold nugget
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Alternative investments are nontraditional investments beyond the more typical stocks, bonds or mutual funds. No matter if you have short-term or long-term strategies, the main reason for investing money in alternative assets is to own some real assets that don’t move in lockstep with the stock and bond markets.

About Alternative Investments

Though most alternative assets such as property, hedge funds or other commodities are less liquid than some investments, they do tend to have fewer restrictions or regulations placed upon them by the U.S. Securities and Exchange Commission. The reason these investments and assets are considered to be alternatives is because they don’t get filed in the categories of equity, income or cash. 

9 Alternative Investments To Consider

Alternative investments are not all exotic. The important thing from a portfolio diversification perspective, whether it’s your pension fund or other financial assets, is that their values don’t correlate directly with stocks and bonds. Here’s a look at nine alternative investments, how they operate and what type of investors might be interested in owning them.

  1. Hedge funds
  2. Precious metals
  3. Futures
  4. Commodities
  5. Real estate investments
  6. Collectibles
  7. Crowdfunding platforms
  8. Venture capital
  9. Private equity

1. Hedge Funds

Hedge funds are something like mutual funds on steroids. Hedge funds take money from investors and buy securities, just like mutual funds, but the success of a hedge fund is determined more by a manager’s skill than the performance of the markets overall.

Investing for Everyone


  • Generally less regulated and restricted than mutual funds
  • Can typically buy nearly any investment they want
  • Often run by superstar managers
  • Usually engineered to be non-correlated with the general markets


  • Investors don’t always know exactly what the fund owns
  • Investors often have limited access to funds
  • Can be expensive; the traditional hedge fund pricing model called for a 2% annual fee plus 20% of profits

Who it’s best for: Hedge funds are for sophisticated investors, due to their complex investment strategies. In most cases, you must be an accredited investor to buy into a hedge fund, which means you must have a minimum level of assets and income.

2. Precious Metals

Precious metals like gold and silver are more than just building blocks for jewelry. They are also investments in their own right.


  • Widely regarded as a hedge against inflation shocks
  • Not directly correlated with stock and bond markets


  • Don’t pay dividends or otherwise return capital
  • Long-term returns are weak in comparison with stock market
  • Can be expensive if you choose to store them, and commissions can be high

Who it’s best for: Precious metals are best for investors looking to hedge their positions in other investments, and have done their due diligence, particularly in a sharply rising inflationary period.

3. Futures

Futures are contracts in which buyers and sellers agree to exchange an asset in the future at a specified price. Futures are often used to hedge other investments if an investor anticipates a price drop in the future. They can also be used to speculate on future price movements.

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  • Can hedge your investments
  • Leverage and margin requirements mean only having to put up a portion of your investment
  • Very liquid market


  • Speculative
  • Can lose more money than you initially invest

Who it’s best for: Futures can be used by both investors who want to hedge positions and financial advisors who want to make speculative gains.

4. Commodities

Commodities are products such as timber, corn, soybeans, oil and gas. They include a wide spectrum of raw materials and natural resources. You can buy the raw products themselves or funds that invest in commodities.


  • Can offer high returns
  • Good hedge against inflation
  • Diversified against other asset classes


  • Can be volatile
  • Carry numerous risks, including exposure to international currencies and turmoil
  • Assets under management can use speculative futures

Who it’s best for: Investors looking for diversification into nontraditional markets might be candidates for an investment in commodities.

5. Real Estate Investments

Real estate is land or property. From an investment perspective, you can either buy real estate outright or through various investment vehicles, such as real estate investment trusts.


  • Real estate can provide cash flow, through rental income or REITs
  • Real estate can perform well in rising inflationary periods


  • Individual real estate properties can go down in value
  • Real estate is generally more illiquid than other investments

Who it’s best for: Investors looking to diversify who believe in the long-term health of housing and real estate markets might be well-suited for these types of investments. Investors who don’t already own their own property might benefit even more from the diversification.

Investing for Everyone

6. Collectibles

Collectibles are items like rare coins or artwork.


  • Can satisfy personal desires for collections
  • Typically uncorrelated with stock and bond markets


  • Can cost high commissions to purchase
  • The value of some collectibles, like coins, might be restricted to the intrinsic value of their metal
  • Can be illiquid
  • Might have higher tax rates upon sale than other capital gains

Who it’s best for: Rare coins and artwork appeal to collectors, who attach an emotional value to beautiful works of art. They also round out more traditional investment portfolios. Some collectibles fetch very high prices.

7. Crowdfunding Platforms

Crowdfunding platforms allow everyday investors to own a portion of a startup company. Whereas new companies used to raise money only from angel investors or venture capitalists, they can now draw from anyone.


  • Startups can have huge returns, especially if the company goes public in an IPO
  • Crowdfunding allows all investors access to startups
  • Most platforms have a menu of different investment options


  • Startup companies can be risky, and you can lose all your money
  • About half of all startups fail within the first four years

Who it’s best for: Crowdfunding platforms are a good option for investors looking for access to new companies that might have values or products in line with their own interests.

8. Venture Capital

A venture capital firm is something like an advanced version of a crowdfunding platform. Managers of a venture capital firm raise money and invest it into early-stage companies.

Investing for Everyone


  • Professional managers have an edge when it comes to locating promising companies
  • Investments that pan out can generate high returns


  • Can be hard to access top-flight VC firms, which typically have a backlog of investors
  • Startup investments by nature are risky and volatile
  • Usually limited to investors with high net worth

Who it’s best for: Experienced investors that can handle the high-risk, high-reward nature of venture capital are most suitable for these types of investments.

9. Private Equity

Investing in private equity means buying shares of companies that do not trade on public markets, stock exchanges or are otherwise publicly traded. This can be an exciting way to participate in the growth of a new company.


  • Can offer the potential for high returns, especially if the company eventually goes public in an IPO
  • Private companies don’t have to disclose information to the public about their performance


  • Can carry a high risk
  • Can require multiyear investments

Who it’s best for: Private equity is suited to investors willing to take on additional risk in exchange for the potential of higher returns, and those who can afford to make multiyear commitments to an investment.

Final Take

Unlike ETFs or retail-oriented mutual funds, alternative investments have relatively high fees and minimum investments. They are also more illiquid and difficult to verify the financial data or value of than some securities but often have lower transaction costs.

Investing for Everyone

Although stocks and bonds get most of the commentary from the financial news networks and newspapers, there’s a whole world of alternative investments out there to choose from. Most offer trading patterns that are non-correlated with more traditional markets, and all offer various pros and cons to different types of investors.


Here are the answers to some of the most frequently asked questions regarding alternative investments.
  • What is an example of an alternative investment?
    • Here are some examples of alternative investments:
      • Hedge funds
      • Precious metals
      • Futures
      • Commodities
  • What is the best alternative investment?
    • Here are some of the best alternative investments to consider:
      • Real estate investments
      • Collectibles
      • Venture capital
      • Private equity
  • Is an ETF an alternative investment?
    • In a very general sense, an ETF can be considered an alternative investment as it is a similar investment strategy that mitigates risk such as with a hedge fund. So though not directly defined as an alternative investment, an ETF can operate in the same way when the returns through its diversified portfolio are not directly correlated to stocks and bonds.

Caitlyn Moorhead contributed to the reporting for this article.


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