Investing in alternative assets can be an effective way to diversify your investment portfolio and potentially achieve higher returns. Alternative assets refer to investments that are not traditional stocks, bonds, or cash, and they can include a wide range of options such as real estate, commodities, cryptocurrencies, private equity, venture capital, hedge funds, and more. Here are a few popular alternative assets and some key points to consider:
- Real Estate:
Investing in real estate can involve purchasing properties directly or investing in real estate investment trusts (REITs) or real estate crowdfunding platforms. The Trust serves as an alternative investment vehicle for diversification into residential and commercial real estate activities. Real estate investments can provide steady income through rental yields and potential capital appreciation.
- Commodities:
Commodities include tangible assets like gold, silver, oil, natural gas, agricultural products, and more. Investing in commodities can act as a hedge against inflation and diversify your portfolio, but it’s important to understand the dynamics of the specific commodity market you’re interested in. The Ghana Commodity Exchange (GCX) is a regulated national and regional market linking buyers and sellers of agricultural and non- agricultural products to trade under rules and discover prices while assuring the market quantity and quality of the products and timely settlement. One of the primary advantages of the GCX trading system is to enable all users (farmers, cooperatives, buyers, brokers, merchants etc.) to trade anywhere in the country, region and the world. Moreover, through the dissemination of data generated through the trading platform, the exchange provides participants with a price discovery mechanism that adds transparency and confidence, and enables participants to negotiate better prices.
- Cryptocurrencies:
Cryptocurrencies like Bitcoin, Ethereum, and others have gained significant popularity in recent years. They offer potential high returns but also come with increased volatility and risks. Before investing in cryptocurrencies, it’s crucial to thoroughly research the technology, market trends, and potential regulatory developments. Cryptocurrencies can be mined, purchased from cryptocurrency exchanges, or rewarded for work done on a blockchain. Not all e-commerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, cryptocurrency values have made them popular as trading and investing instruments. To a limited extent, they are also used for cross-border transfers.
- Private Equity and Venture Capital:
Private equity involves investing in privately held companies, while venture capital focuses on early-stage startups. Private equity and venture capital buy different types of companies, invest different amounts of money, and claim different amounts of equity in the companies in which they invest. These investments typically involve higher risks but can yield substantial returns if successful. Large institutional investors dominate the private equity world, including pension funds and large private equity firms funded by a group of accredited investors. Because the goal is a direct investment in a company, substantial capital is needed, which is why high net worth individuals and firms with deep pockets are involved. Investing in private equity and venture capital often requires a significant amount of capital and access to investment opportunities.
- Hedge Funds:
Hedge funds are investment vehicles managed by professional fund managers. They employ various strategies, such as long-short equity, global macro, or event-driven, to generate returns. Hedge funds are generally available only to accredited investors due to their higher risks and complex structures. A hedge fund’s purpose is to maximize investor returns and eliminate risk. If this structure and these objectives sound a lot like those of mutual funds, they are, but that’s where the similarities end. Hedge funds are generally considered to be more aggressive, risky, and exclusive than mutual funds. In a hedge fund, limited partners contribute funding for the assets while the general partner manages the fund according to its strategy.
key differences between Traditional Investments and Alternative Assets
- Types of Assets:
Traditional investments primarily consist of stocks, bonds, and cash. These are typically traded on public exchanges like Ghana Stock Exchange and are highly regulated. On the other hand, alternative assets encompass a broader range of investments, including real estate, commodities, private equity, venture capital, hedge funds, cryptocurrencies, and more. Alternative assets often have unique characteristics and may involve direct ownership or participation in private markets.
- Risk and Return Profiles:
Traditional investments generally offer more established risk and return profiles. Stocks, for example, have historically provided long-term capital appreciation, while bonds offer income through interest payments. Alternative assets, on the other hand, can have higher risk and potentially higher returns. Investments such as venture capital and cryptocurrencies can experience significant volatility and may carry a higher risk of loss, but they also have the potential for significant returns.
- Market Accessibility:
Traditional investments are widely accessible to individual investors through brokerage accounts, retirement plans, and other investment vehicles. They are often more liquid, allowing investors to buy and sell their holdings relatively easily. Alternative assets, on the other hand, may have higher barriers to entry. Some alternative investments, such as private equity or hedge funds, may require a higher minimum investment and may only be available to accredited or qualified investors. Additionally, certain alternative assets may have limited liquidity, meaning it can be more challenging to sell or exit the investment.
- Regulatory Framework:
Traditional investments are subject to well-established regulatory frameworks, such as securities laws, financial reporting requirements, and investor protections. These regulations aim to ensure market transparency, fairness, and investor confidence. Alternative assets may operate under different regulatory frameworks, depending on the asset class and jurisdiction. For example, real estate investments may have specific regulations related to property ownership and leasing, while cryptocurrencies may face evolving regulations related to securities, taxes, and anti-money laundering.
- Diversification Benefits:
Alternative assets are often sought after for their diversification benefits. They can have lower correlations with traditional investments, meaning their performance may not move in tandem with the broader stock or bond markets. Adding alternative assets to a portfolio can help reduce overall portfolio risk and increase the potential for higher returns through diversification.
Advantages of Investing in Alternate Assets
- Diversification:
Alternative assets provide an opportunity to diversify your investment portfolio beyond traditional asset classes like stocks and bonds. Diversification helps reduce the overall risk of a portfolio by spreading investments across different types of assets that may have low correlation with one another. This can help protect against potential losses in any one investment and improve the risk-return profile of the portfolio.
- Potential Higher Returns:
Alternative assets often have the potential to generate higher returns compared to traditional investments. Investments such as private equity, venture capital, or real estate can offer attractive long-term returns through capital appreciation, rental income, or business growth. Cryptocurrencies, for example, have experienced significant returns in recent years, although they also come with higher volatility and risks.
- Lower Market Volatility:
Alternative assets can exhibit lower correlation with traditional markets, such as stocks and bonds. This means that their performance may not be as closely tied to broader market movements, offering potential stability during market downturns. This characteristic makes alternative assets attractive for risk mitigation and potentially enhancing overall portfolio performance.
- Unique Investment Opportunities:
Alternative assets provide access to unique investment opportunities that are not available through traditional investments. These opportunities may include investing in private companies, early-stage startups, real estate development projects, or niche sectors like renewable energy or art. By diversifying into these areas, investors can tap into potential growth sectors and capitalize on specialized market trends.
- Inflation Hedge:
Some alternative assets, such as real estate, commodities like gold or oil, or infrastructure investments, can act as a hedge against inflation. These assets have historically demonstrated the ability to preserve purchasing power over the long term, as their values tend to increase with inflationary pressures.
- Potential Tax Benefits:
Alternative assets can offer certain tax advantages that are not typically available with traditional investments. For example, investments in real estate may provide tax deductions on mortgage interest, depreciation, or property expenses. Some jurisdictions also offer tax incentives for investments in specific industries or sectors, such as renewable energy or affordable housing.
It’s important to note that alternative assets also come with their own risks and complexities. When considering alternative assets, it’s essential to assess your risk tolerance, investment goals, and time horizon. They often have less liquidity compared to traditional investments, and they may require a longer holding period. Additionally, alternative investments may have higher fees, lower transparency, and specific regulatory considerations. It’s advisable to consult with a financial advisor or investment professional who can provide guidance tailored to your specific circumstances.
I hope you have enjoyed the reading and learnt a few lessons you can apply immediately to your personal investment planning. Do not hesitate to contact me should you require further assistance to manage your personal portfolio.
The writer is the Chief Marketing Officer (CMO) and Investment Advisor, Ashfield Investment Managers. She can be reached on +233246152750, E-mail [email protected] or [email protected]
