Investing has always been about risk and reward. While no investment is ever 100% “safe,” some carry far more risk than others, which is why the average portfolio consists of stocks, bonds, and cash equivalents.

In the 21st century, however, modern investors have realized they have other options for wealth-building outside the traditional portfolio. Alternative investments are a diverse class of assets that offer the potential for enhanced returns and unique growth opportunities.

But how do alternative investments compare to traditional assets? Let’s find out.

What Are Alternative Investments?

An alternative investment is any investment other than the traditional trifecta of stocks, bonds, and cash.

Real estate is the most common and widely held alternative investment, but it’s just the tip of the iceberg. Hedge funds,private equity, gold, art—and, more recently, Bitcoin—are all considered alternative investments.

Alternative investments have grown in popularity over the past few decades because, unlike traditional investments,alternatives are often uncorrelated to broader market performance. The right alternatives can prove to be resilient investments during a downturn in the stock market.

But it’s not just about diversification. Alternatives can offer higher potential returns than traditional assets, albeit with a higher degree of complexity and risk.

Traditional Assets: Tried and True

To understand alternative assets, it’s important to understand traditional assets first. Traditional assets are so widespread because they’re reliable. Liquidity is paramount in well-established markets, meaning investors can enter and exit positions without worry.

• ‍Stocks: Microsoft. Tesla. Gamestop. ‘Shares’ represent shared ownership in companies, and the major stock indexes, such as the S&P 500 and NASDAQ, have historically provided strong returns over the long term.‍
• Bonds: Whether U.S. Treasury bonds or corporate debt securities, bonds pay investors a ‘fixed income’ for a set period. They offer stable, predictable cash flow and a lower risk profile than stocks, but they typically offer lower returns.‍
• Cash or cash equivalents: Hoarding a huge cash pile is not recommended since inflation will erode its value over time. That being said, having ‘dry powder’ to deploy during downturns so you can scoop up discounted stocks isn’t a bad idea.

Traditional assets often come with a wealth of publicly available information, making them more transparent and easier to analyze than their alternative counterparts.

Key Differences: Alternative vsTraditional

Understanding the important distinctions between these two investment types can help investors craft a more balanced and optimized portfolio.

Types of Alternative Investments

1. Real Estate

The least “alternative” of alternative assets, real estate is a cornerstone of wealth building. Residential and commercial properties are tangible and relatively stable assets that appreciate over time in most circumstances.

But the market has evolved. From real estate syndications to real estate investment trusts (REITs), investing in diversified properties via pooled capital resources gives individual investors a way to own highly competitive portfolios, often with lower upfront capital commitments.

2. Hedge Funds

Is a hedge fund an alternative investment? Absolutely. Hedge funds are private funds that use unique, advanced strategies to achieve market-beating returns. This could range from short-selling to derivatives like options and everything in between.

While hedge funds can certainly outperform traditional assets, they require a lot of expertise and often cater to institutional or accredited investors. Many hedge funds may have a few headline-making years but eventually under perform the markets over long periods. The funds that consistently outperform are like diamonds in the rough.

3. Private Equity

Private equity is a direct investment into a private company, whether a well-established company or a burgeoning startup. If you don’t mind a high degree of risk and a long lockup period,these investments can be a great option—especially if you find a sector or business you’re passionate about.

4. Commodities

Commodities like gold, oil, and agricultural products are tangible assets that provide a hedge against inflation and currency fluctuations. Unlike stocks or bonds, commodities are influenced more by global supply and demand dynamics. However, the value of many commodities tends to be seasonal or cyclical, which typically requires abroad macroeconomic knowledge base.

5. Cryptocurrencies

Cryptocurrencies, like Bitcoin, have been making headlines over the last decade. They are the most “alternative” of these investments—and certainly not for the faint of heart. Bitcoin has the highest annual returns of any public investment in history but is also highly volatile and can sometimes crash 50–90%.

6. Collectibles

Believe it or not, your old baseball (or Pokémon)cards are considered alternative investments. Entire hedge funds are built around collectibles. Collectibles cover a wide range of categories, with options ranging from fine art and vintage cars to rare wines and whiskeys,catering to a diverse range of niche interests. However, their value often hinges on market demand.

7. Pre-IPOs

Pre-IPO investments allow individuals to invest in private companies before they go public, offering shares at discounted rates. These investments come with risks like illiquidity and uncertainty regarding whether the company will successfully go public. For investors willing to accept these challenges, pre-IPOs can offer potential substantial returns.

Alternative Investment Management

At its core, alternative investment management is similar to traditional asset management. You help investors navigate the right opportunities for their unique portfolios.

Where it differs is in risk management. Because alternative investments are illiquid and require different analytical skills to assess, it’s important to choose a strong alternative investment management partner.

HUDSONPOINT capital has the team and experience to leverage alternative assets effectively and responsibly.

Risks and Considerations

Alternative investments carry a special set of risks—make sure you know what you’re getting yourself into:

1. Illiquidity: Many alternatives lock in capital for years, limiting flexibility.
2. High Minimum  Investments: Hedge funds, private equity, and other options often require substantial initial contributions.
3. Complexity: Understanding these assets requires expertise, which may not be  accessible to the average investor.
4. Regulatory  Risks: Alternatives are less regulated, making them susceptible to fraud or mismanagement.

Don’t forget to consider the tax implications of alternative investments. Some, like real estate, offer tax advantages such as depreciation, while others may generate significant taxable events.

Finding the Right Balance

The question isn’t whether alternative or traditional investments are better—it’s about understanding how they complement each other.

While traditional assets are important for a diversified portfolio, so are alternatives. Many believe the traditional stock-and-bond portfolio is outdated for qualified investors with a higher risk tolerance and 15–30% of a modern portfolio should be devoted to alternative investments.

Is your portfolio missing alternativeinvestments?

Ultimately, adding alternative investments to your portfolio is yours and yours alone. You must consider your unique goals, risk tolerance, and time horizon.

HUDSONPOINT capital specializes in guiding investors through the intricate landscape of alternative assets. Whatever alternative investment you’re looking for, we’re here to help. Contact us today to explore how we can help you build a robust portfolio.

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