Alternative assets: What are they and are they preferable to stocks?

Nick Sundich Nick Sundich, December 19, 2023

We thought we’d take a look at so-called alternative assets.

Stocks have always been the go-to investment option for people looking to grow their wealth. However, with increased volatility and uncertainty in traditional stock markets, investors are turning towards alternative assets as a means of diversifying their portfolio.

 

What are Alternative Assets?

Alternative assets refer to any type of tangible or intangible asset that is not traded on a public exchange like the ASX. These assets can range from physical assets like real estate, commodities, and collectibles to financial assets such as private equity, hedge funds, and cryptocurrencies.

We would note that real estate and commodities may not always be alluded to under this umbrella term because they are popular investment options. And sometimes they can be traded on public exchanges. Nonetheless, we will fit these asset classes under this umbrella for now.

 

Benefits of Alternative Assets

We see four benefits in particular, the first of these is diversification. By investing in alternative assets, investors can reduce their overall risk by diversifying the sources of their returns. This is because alternative assets are not correlated with traditional stock markets and therefore, their performance is not directly affected by market fluctuations.

The second is the potential for Higher Returns compared to traditional stocks. For example, private equity funds can offer annualised returns of 10-20%, while real estate investments can yield double-digit returns. Of course, your mileage may vary dependant on what specifically you invest in.

The third is that they can be an inflation hedge. This means that their value tends to increase with inflation, making them a valuable addition to an investor’s portfolio. Gold and real estate are two prominent examples and bitcoin has been put in this category too.

The fourth is the access to Unique Opportunities for investors. Alternative assets often have lower barriers to entry compared to traditional investments, allowing investors access to unique opportunities that may not be available in the public stock market.

 

Potential Risks

While alternative assets offer numerous benefits, they also come with their own set of risks, some of which are not shared with listed stocks.

The most important is Illiquidity. Unlike stocks which can be easily bought and sold on a public exchange, alternative assets have limited liquidity. This means that it may take longer to cash out an investment in these assets compared to traditional stocks. That is, if it is possible at all – it might not necessarily be.

The second is regulation, or the lack thereof. Alternative assets are not subject to the same regulations as traditional investments, which can make them riskier. It is important for investors to thoroughly research and understand the risks associated with a particular alternative asset before investing.

The third is potential for higher management and performance fees compared to traditional stocks. These fees can eat into potential returns and should be carefully considered before investing.

 

Conclusion

In today’s volatile market, alternative assets can offer investors a way to diversify their portfolio and potentially generate higher returns. However, it is important for investors to thoroughly research and understand the risks associated with these assets before investing.

As with any investment, seeking professional advice is recommended to make informed decisions and build a well-rounded investment portfolio. Alternative assets should be seen as a complement rather than a replacement for traditional investments such as stocks.

By diversifying one’s portfolio with alternative assets, investors can reduce their overall risk and potentially achieve higher returns over the long term. So, although alternative assets may not be preferable to stocks, they can play a valuable role in an investor’s overall investment strategy.

 

 

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