Any sustainable and smart investment strategy must have a substantial level of diversification. This helps to minimise unsystematic risk in the investment portfolio. However, reaching a high level of diversification may be limited if an investor uses only traditional financial assets (i.e., common stocks or bonds). Alternative investing allows the formation of a highly diversified portfolio with a maximum return at a given level of risk.
The group of non-traditional assets enables a lower correlation between an investment portfolio and the stock market, providing additional diversification and an increase in the overall expected return level. Investments in such assets are called alternative investments. Let’s take a closer look at them.
A hedge fund is a private investment fund, which differs from banks and other investment funds by minimal legal restrictions and a wide range of instruments, usually dealing with complex financial instruments.
Hedge funds are considered a robust investment, as official data shows that the value of assets under hedge fund management worldwide in 2020 amounted to more than $3,8 trillion (R570 trillion).
Hedge fund managers run the investments of the client pool and choose the areas for investment at their discretion. These can be various stocks, bonds, precious metals, real estate, derivatives, and so on.
- The opportunity to buy any asset
- Less regulated area
- Designed to eliminate correlation with general markets
- Professional supervision
- Flexible response to changing market conditions
- A long-term perspective
- Limited access to funds
Cryptocurrency needs no introduction as it is a booming trend in the alternative investing niche, with Bitcoin being the absolute leader in this sector. The statistics of the cryptocurrency market are impressive.
Bitcoin is currently valued at $37,945.76 and has a market capitalisation of $719 billion, while Ethereum is valued at $2,799.69 and has a market cap of $333 billion.
While not every investor can afford to buy Bitcoin, there are already many other affordable alternatives, and new types of cryptocurrencies appear in the market virtually daily. For example, Tether, Cardano, Polkadot, and Terra provide a lower entry threshold for investing and demonstrate growth in asset values in the market.
- Deflationary nature
- High volatility
- No intermediaries
- The primary income source lies in the exchange rate difference
- Hacker attacks
- Lack of a legal framework
- Prohibition of some countries on the use of cryptocurrency
Although blockchain and cryptocurrencies have existed for years, NFT is a relatively new phenomenon. Still, the NFT’s performance for investment is promising.
NFT trading volume totalled nearly $10,7 billion in the third quarter of 2021.
The NFT is a unique digital certificate stored in a blockchain, which guarantees the item’s originality and provides exclusive rights. By purchasing an NFT token, the buyer acquires a certificate for the artwork. This certificate is essentially code lines that confirm that the token owner is the owner of the original copy of the object.
- The market is growing in popularity
- Ability to sell directly to collectors
- A strong community of supporters
- Hacker attacks
- High transaction fees
- Not fully explored sales market
- Uncertain government regulations
Precious metals are an alternative asset tool in a volatile global economy, as their value does not depend on the exchange rate of national currencies. The most common precious metals for capital growth are gold, silver, platinum, and palladium.
The value of the global precious metal market is expected to reach $403 billion by 2028 compared to $275 billion in 2021.
- Widely regarded as an inflation insurance solution
- No direct correlation with stock and bond markets
- High liquidity when buying shares of companies mining precious metals
- Opportunity to gain income by increasing the cost of the precious metal
- Political instability in precious metal production regions
Collectibles and Antiques
Although collectibles and antiques are alternative asset options, they can offer impressive returns in the long run.
The official figures show that the global collectibles market is strengthening its position and is expected to reach $628 billion by 2031.
Such investments include antiques, art, Chinese ceramics, rare wine, whiskey brands, watches, stamps, coins, and retro cars. The main feature of collectibles is the uniqueness of the items themselves, and some of them are virtually one of a kind.
- No price correlation with traditional assets
- Growing availability
- Protection against inflation
- The risk of buying fake items
- The unregulated market price
- No passive income
- High illiquidity
Investing in private equity is one of the best alternative investments. It involves buying shares of companies not traded on public stock exchanges. The investor only needs to provide the capital that will make the deal possible. The intermediary company further manages all the financial assets of the investors to make a profit.
According to Deloitte, private equity assets under management worldwide are expected to reach $5.8 trillion by 2025.
This option, known as alternative assets, can provide investors with a higher return than investments in public companies, but involves a certain level of risk.
- Potential for high returns
- Private companies do not need to disclose their performance to the public
- Less volatile compared to public companies’ shares
- Requires a multi-year investment to be successful
Venture capital funds are investment entities that invest in high-potential innovative companies, mostly high-tech start-ups. This type of investment aims to choose companies that demonstrate significant growth potential and the ability to generate a high return in the long term. Therefore, venture capital funds mostly focus on long-term profits and offer investments for seven to 10 years.
- Extensive investment options
- Attractive returns profile
- Investing in start-ups is inherently risky and volatile
- High entrance threshold
- Profit depends solely on the start-up success
Investing Funds with IFSA
Alternative investments provide diverse asset allocation options. Therefore, investors should consider the differences and characteristics of the tools in each specific category of alternative investments to make the most rational decision in the selection of suitable assets for the portfolio.
Investing with IFSA Private Equity offers investments through a team of skilled professionals with over 60 years of combined expertise. In addition, IFSA provides a personalised approach to the analysis of the investment portfolio to determine further development potential and necessary diversification.
Download our Fund Fact Sheet to find out more about what we offer.
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