In recent years, many investors turned to alternative investments to complement traditional stocks and bonds. Alternatives gained rapid traction due to lower correlations during economic downturns, such as those created by the looming pandemic. Growth rates are expected to reach 59% by 2023, at a value of $14 trillion in assets under management.
Defining Alternative Investments
Alternative investments refer to a group of financial assets that do not fall under conventional stocks, bonds, and cash.
The key differentiating factor of alternative investments is that they are not publicly traded. This makes them less liquid than traditional investment options. Furthermore, since alternatives are not heavily regulated, it’s necessary for investors to perform due diligence. Alternatives can be high-risk, but also carry great opportunity for reward.
Who are Accredited Investors?
Due to the nature of alternatives, they are usually made available to accredited investors. Under federal securities law, an accredited investor is a person who meets one of the following requirements:
Income: Earns an annual income that exceeds $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonably sustains this level of income every year.
Net worth: Has a net above $1 million, as an individual or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence).
Professional experience: Holds in good standing a Series 7, 65, or 82 licenses. To obtain for these licenses, an individual must pass the qualifying examinations.
The Securities and Exchange Commission’s (SEC) stringent criteria aims to protect those who do not have cash reserves to weather significant losses.
4 Alternative Investments Available to Accredited Investors
Accredited investors can choose from a wide range of alternative investment options to diversify their portfolio. Here are four common alternative investments available to accredited investors:
1. Non-fungible tokens (NFTs)
Non-fungible tokens are a unique class of digital assets stored with blockchain technology. Each NFT has a unique identification code that distinguishes it from the others to prevent replication. They come with the reassurance of authenticity and safety. Since they cannot be counterfeited or altered, NFTs are a secure asset ownership method.
Although investors can purchase NFTs with hopes of triple-digit value appreciation, the real value lies in transforming market functions. NFTs convert physical assets into digital assets, thus eliminating intermediaries in the supply chain. Digitization expands the market for certain assets leading to liquidity and higher prices. Furthermore, physical assets can be fractionalized (divided into multiple owners) into NFTs, increasing investment accessibility.
2. Blockchain Cryptocurrency
Cryptocurrencies are decentralized, digital currencies. Their unparalleled performance over the past several years have helped investors achieve massive returns while reducing overall portfolio risk (for those with diversified, balanced portfolios).
Cryptocurrencies are designed to store value with resistance to inflation and depreciation. Its value lies in the hands of people – rather than by a bank or government. Cryptocurrencies are not regulated by the government or any financial institution.
However it’s important to note that cryptocurrencies are highly volatile and carry unique risks beyond concerns of liquidity and volatility. It’s important to conduct proper research and maintain a well-diversified, balanced portfolio.
3. Collectibles
Collectibles are physical objects that people buy with hope of appreciation. The most unique thing about collectibles is they allow investors to expand their portfolio while exploring personal interests. There are various categories of collectibles. The most common include stamps, fine art pieces, sneakers, coins, wines, and toys.
Like any other investment, there is no guarantee that a collectible’s value will appreciate. Yet appreciation is all a collectible can offer. There are no options to cash in dividends or collect interests. This makes collectibles extremely high-risk investment options.
Collectibles’ value are also influenced by the state of the economy. When the stock market performs well, investors have more disposable income, allowing them to purchase collectibles. Investors should stay up-to-date with economic performance to determine when to buy, sell and hold collectibles.
While investing in collectibles, seek items you love so that if the value never appreciates, the asset still brings you joy.
4. Structured Products
Structured products involve fixed income markets that pay investors dividends and derivatives. The value is derived from an underlying asset or group of assets like stocks, market indices, and bonds. The most common structured products include collateralized debt obligations and credit default swaps.
Structured products are complex and highly risky investment products that offer investors a customized product mix to diversify their portfolio. Investment banks typically create structured products and offer the deals to hedge funds and accredited investors. While investors benefit from the returns, they also gain taxation benefits. As a result, investors benefit from the same gross taxation treatment as the returns generated by other lump sum investments.
Manage your alternatives with AltExchange
While alternatives have historically been exclusive to accredited investors, there’s more opportunity arising for non-accredited investors. AltExchange’s mission is to make alternatives a more efficient, accessible marketplace for everyone. Whether you’re an accredited investor with $10 million in assets under management, or just starting out, we can help you track alternative investment performance to ensure you make the best investment decisions possible.