Everyone knows about traditional investments such as stocks, bonds, and mutual funds. However, there are also Alternative Investments which are unconventional investments. Some common alternative investments that every one should know about are Hedge Funds, Real Assets (comprised of Real Estate, oil, precious metals, commodities, etc.) , Private Equity, and Venture Capital.
1) Venture Capital
Venture Capital is the financing of (from investors) start-up companies or small businesses that have strong growth potential. Investors usually invest above six figures to the millions into these companies. This may seem like a risk for venture capitalists, but they can control the direction and progress of the company by adding on technical and managerial expertise. Venture Capitalists usually expect 20% ROI (return on investment).
Angel Investors are similar to Venture Capitalists, but donate smaller sums of money ,usually in the thousands, to start up companies. They differ from Venture Capitalists because they give more freedom to the start up, and allow them to operate how ever they want.
2) Real Assets (Real Estate, Oil, Commodities, and Agriculture land.)
Real Assets comprises of several physical/tangible assets that all have intrinsic value such as the assets listed above and more. Investors can either buy real assets directly, or invest with a fund specializing in a specific real asset such as a Real Estate Investment Trust (REITs)
3) Hedge Funds
Hedge Funds are simply pooled investment funds that are formed to invest in a variety of aggressive strategies and asset types. It is a managed portfolio in which money managers pick securities (financial instrument that has monetary value and can be traded such as stocks, bonds, etc.) that they believe will perform well. Portions of the fund are then sold to these investors who can participate in the gains/losses of the holdings. The main advantage of hedge funds for investors is that they get instant diversification and professional management of their money.
Hedge funds are usually available to “sophisticated” or “Accredited” Investors because they must fulfill a minimum one million dollar requirement in earnings, and there are also other lengthy requirements in investing in a hedge fund.
You can also think of it as a mutual fund for wealthy people. However, Hedge Funds usually take on more risk, and take advantage of Leverage. They have the ability to short-sell stocks (motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit), and have speculative positions in derivatives such as options (it’s possible for hedge funds to make money when the market is falling).
4) Private Equity
Public Equity-> Sold on a public exchange such as the NYSE. Went through an Initial Public Offering, and investors can purchase shares of stock in these public companies on exchanges
Private Equity->Companies that have not gone public (Not sold on public exchanges such as the NYSE)
Private Equity firms are firms that hope to buy several small, underperforming, private businesses (meaning not sold on a public exchange such as the NYSE) and sell them in a couple years for a profit. They will also provide their expertise and management to make sure the company they invested in is heading towards a good direction, and will increase profitability.
Private Equity firms also perform buyouts on public companies, resulting in the delisting of public equities, turning them into private companies.