Maybe you have heard of alternative assets, but you are not sure why they are relevant, what they are, or who invests in them. This article is a short primer on alternative assets and will attempt to answer these questions.
Why are alternative assets relevant?
Traditional assets such as stocks and bonds tend to be volatile and highly correlated in times of crisis (correlations go to 1). These attributes make preserving long term wealth very difficult for investors who become panicked and sell at rock bottom prices. Alternative assets on the other hand can offer investors a smoother and more predictable investment experience than traditional assets.
What are alternative assets?
#1 They are not stocks and bonds.
#2 They are not publicly traded i.e. you cannot but them through your stock brokerage account.
Common types of alternative assets include private equity (investing in private businesses) and private direct real estate (investing in direct ownership of real estate) for example for rent apartment (multi-family) buildings, office buildings, shopping centres, and warehouses. Other forms of alternative assets include venture capital (investing in start-ups), hedge funds, and commodities for example gold or oil.
Are alternative assets popular?
The industry is growing rapidly, and the benefits of alternative investing are becoming more well known – all this of during a time of high stock market volatility.
According to the CAIA Association, the professional body for alternative investments (of which this author is a Member), from 2003 to 2018 alternative assets grew from 6% to 12% of the global investment market. By 2025, CAIA Members expect this growth to continue to 18% to 24% of global assets.
Who invests in alternatives assets?
Institutional investors such as pension funds and insurance companies hold up to 30% of their overall investment assets in alternative assets. High net worth families and individuals also choose to invest in alternative assets.
How do they get access to alternative assets?
Alternative assets are not bought and sold through your stock trading account. For this reason, most people typically learn about alternative asset managers with active opportunities through their personal and social networks.
Investors in alternative assets typically invest passively and with limited liability through legal structures called Limited Partnerships. These legal structures share the risks and responsibilities between the money partners (Limited Partners) and managers (General Partners).
Why do people choose to invest in alternative assets?
#1 Enhanced returns
#2 Tax benefits
#3 Alternative assets are not correlated to stock market.
Hopefully, this article helped shed some light on why alternative assets are relevant, what they are, and who invests in them.
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