Alternative investment

A British 1 shilling embossed stamp, typical of the type included in an investment portfolio of stamps.

An alternative investment is an investment in asset classes other than stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, carbon credits, venture capital, film production and financial derivatives. Investments in real estate and forestry are also often termed alternative despite the ancient use of such real assets to enhance and preserve wealth. Alternative investments are to be contrasted with traditional investments.

Research

There is a wide variety of literature on alternative investments; however, this term has been used broadly and can also refer to financial alternatives such as derivatives or other alternatives such as energy. It is difficult to find research on the investment characteristics of tangible alternatives such as art or wine due primarily to a lack of good quality data. The Goizueta Business School at Emory University has established the Emory Center for Alternative Investments to provide research and a forum for discussion regarding private equity, hedge fund, and venture capital investments.

As with any investment, it’s important to do your homework, but in the case of many alternative investments, some specialist knowledge on the specific asset is often needed. Therefore it’s important that would-be investors have a reputable broker or investment company on their side with demonstrable success in their asset class arena, which are happy to work with you to identify your ideal investment solutions.

Investors

The Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, based on 2002 data, showed high-net-worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007, this had reduced to 9%. No recommendations were made in either report about the amount of money investors should place in alternative investments.

A Good Delivery bar, the standard for trade in the major international gold markets.

Characteristics

Alternative investments are sometimes used as a way of reducing overall investment risk through diversification.

Some of the characteristics of alternative investments may include:

• Low correlation with traditional financial investments such as stocks and bonds
• It may be difficult to determine the current market value of the asset
• Alternative investments may be relatively illiquid (see "Liquid alts")
• Costs of purchase and sale may be relatively high
• There may be limited historical risk and return data
• A high degree of investment analysis may be required before buying

Liquid alts

Liquid alternatives ("alts") are alternative investments that provide daily liquidity. Liquid alternative investments should produce returns uncorrelated to GDP growth, must have protection against systemic market risk and should be too small to create new systemic risks for the market.

There has been expressed skepticism over the complexity of liquid alts and the lack of able portfolio managers.

See also

• Liquid Alternative Investment
• Chartered Alternative Investment Analyst
• Philatelic investment
• Traditional investments
• Platinum as an investment
• Gold as an investment
• Palladium as an investment
• Silver as an investment
• Lithium as an investment
• Investment wine

External links

• Portfolio Diversification benefits of Investing in Stamps by Chris Veld, University of Stirling. (Incomplete first draft)