Alternative Investments for Dummies: Alternative Investments Defined and Explained

Alternative Investments Defined

Broadly speaking, alternatives are investments in assets other than stocks, bonds and cash, or investments using strategies that go beyond traditional methods, such as long / short or arbitrage strategies. This is according to a definition provided by Blackrock.   Secondly, Alternative Investments can be described as “non-correlated” assets – meaning that their performance doesn’t follow that of “traditional assets” like stocks and bonds. For this reason, alternative investments are considered a hugely effective way to balance risk in a portfolio and provide a “cushion” against a stock or bond meltdown. This is extremely important in the current global economic Covid-19 climate. 

The Rise of Alternative Investments

Alternative Investments have always held fascination by investors; however, these investments have gained popularity in recent years following the 2008 financial crisis. We predict their popularity will rise even further against the backdrop of Covid-19. 

Alternative investments, such as private equity and venture capital as well as tangibles, are for the most part illiquid and considered uncorrelated. Their value also trends irrespective of the broader market and increases with wider usage and more adoption. The Covid-19 pandemic has had a huge, negative effect on GDP and interest rates. Thus, investments which aren’t strongly correlated to GDP and interest rates will be more prominent than ever before

Some Stats and Facts (according to Jack Tatar)

• ïA 2015 survey showed that advisors had 73% of their clients in alternative investments and that 70% of advisors planned to maintain their current alternative investment allocations for clients
• ïMost advisors recommended a range of 6 – 15% of a client’s portfolio to be held in alternative investments
• ïRetail firms like Morgan Stanley and Merrill Lynch have recommended allocation models with alternatives near or above 20% of a portfolio 

Examples of some Alternative Investments or Alternative Assets: 

• Security Tokens
• Real Estate
• Tax lien certificates
• Stock or membership units in a privately held business
• Commodities – including precious metals such as gold, silver, platinum etc.
• Farmland
• Mineral Rights
• Intellectual Property
• Art and Collectables
• Private Equity
• Venture Capital
• Tax Credits
• Hedge Funds
• And More!!

Benefits of Alternative Investments

• Possibility of tax-advantaged or sheltered cash flows
• Low correlation with standard asset classes: the value moves irrespective to the stock and bond markets and thus a suitable tool for portfolio diversification 
• Investments in hard assets provide an effective hedge against inflation which hurts the purchasing power of paper money
• The non-accredited retail investor has access to alternative investments 
• High and stable rewards

The Finka Token is a first of its kind Alternative Asset as it is democratising cattle as an asset class for the very first time, using blockchain technology. It is also giving investors from the developed world access to investments in the developing world, hence increasing the potential liquidity in the developing world. Alternative investments as well as ways to bring prosperity to the developing world are more important than ever.