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What is an Alternative Investment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 November 2016
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An alternative investment is any type of investment option that is considered to be outside the mainstream of traditional investments. For the most part, traditional investments are defined as stocks, bonds, cash or money markets. By contrast, an alternative investment would include such options as real estate deals, private equity strategies, hedge strategies, commodities, or financial derivatives.

In many instances, the decision to consider an alternative investment usually has to do with the idea of earning a substantial return in a relatively short period of time. Since the degree of risk associated with most alternative forms of investments is considered higher than the risk associated with traditional investments, the idea is that the return will also be higher. However, that is not always the case.

Another traditional thought regarding an alternative investment is that the factors impacting the performance of traditional investments are much less likely to make any significant difference in how alternative investment options perform. While this may have been true in times past, the culture and the rate of change in today’s markets often combine in a way that can have a fair amount of impact on all types of investments.

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Still, there is no doubt that considering an alternative investment at the right time can be a profitable venture. For example, choosing to purchase property when the values are low and reselling at a substantial profit after property values recover and rise once more can yield a substantial return. The same is true when dealing with managed futures, in that choosing the right futures and holding on to them for just the right amount of time can yield a significant return.

Prevailing laws sometimes limit the type of alternative investment strategies that an investor may consider. In the case of hedge funds, not just any investor is able to participate in the investment option. Most hedge funds only deal with institutions rather than individual investors. Even when individuals are considered eligible, the participation is usually limited to people with substantial assets and are rated as having a high net worth.

As with any type of investing approach, it is a good idea to approach an alternative investment with great care. An investor should learn all the facts about the current and past status of the investment and also consider what factors could influence future performance. This will allow the investor to determine if the potential return associated with the alternative investment is worth the degree of risk.

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