What is an Alternative Investment?
Written by True Tamplin, BSc, CEPF®
Updated on July 10, 2021
Alternative Investment Definition
The term Alternative Investments refers to the types of investments that do not fall in the traditional categories of:
Here are examples of Alternative Investments:
- Hedge Funds
- Private Equity
- Venture Capital
Investing in Alternative Investments
Many Alternative Investments are not actively traded on public markets, making them harder to acquire for the average investor.
However, these investments also have weaker or no correlation to the public markets, therefore, they can be a viable strategy for diversifying a portfolio.
Alternative Investment Example
For example, if an investor made an investment in a venture capital fund that focuses on research startups, and one of the investments recently developed a cure for the common cold, then that investor would experience a significant return on investment even if the stock market was declining.
In a similar way, an investor who invests in oil, which is a relatively volatile commodity, may experience returns that contradict the stock market because oil’s value is largely due to geopolitical issues.
Alternative Investment History
A few drawbacks to Alternative Investments include that they often require a lot of capital to invest (such as the case with venture capital) and that they are often unregulated.
Because Alternative Investments are often unregulated, there is more room for fraudulent financial reporting and misappropriation of assets.
The Chartered Alternative Investment Analyst Association was privately developed in the United States in 2002 for the furthering of research and ethics within the profession.
It represents an early attempt to bring regulation to this field.