What Are Alternative Investments?
What is an alternative investment?
An alternative investment is any asset class outside of traditional stocks bonds, and mutual funds. Many investors turn to alternatives in an attempt to diversify their portfolios and seek returns not tied directly to the public market.
Unlike traditional securities, alternative investments often have longer holding periods, less liquidity and unique risk profiles—but they can also open the door to noteworthy opportunities.
What are considered alternative investments?
Examples of alternative investments include:
- Real estate (rental properties, REITs, and undeveloped land)
- Private equity (including shares of pre-IPO private companies)
- Commodities (precious metals1 such as oil, agriculture)
What are the different types, or categories, of alternative investments?
Broadly speaking, alternative investments fall into four categories:
- Real assets – Real estate, infrastructure, natural resources and commodities
- Private capital – Private equity (including shares of private companies), venture capital and private debt
- Hedge funds – Pooled funds with specialized investment strategies
- Specialty assets
How can you invest alternative investments
Investing in alternatives can be more complex than buying stock, bonds or exchange traded funds (ETFs). Some require accreditation, high minimums or longer lock-up periods.
For retirement savers, a SDIRA provides an accessible pathway to investing in alternative asset classes. With a SDIRA, you can hold a wide range of alternative assets in a tax-advantaged account.
Why invest in alternative investments?
Alternative investments come with an array of potential advantages, which have made them increasingly popular among both individual and institutional investors alike in recent years.
Key benefits of allocating capital to alternative investments may include the potential for:
- Enhanced diversification – Alternative investments can help reduce the correlation of a portfolio to traditional assets such as stocks, bonds and cash.
- Inflation protection – Tangible assets may help preserve value when the purchasing power of money declines.
- Growth opportunities – The opportunity to access pre-IPO, unicorn private companies and emerging industries.
- Potential for higher returns – Alternative investments may have the potential to outperform stocks, bonds and cash.
What are the risks of alternative investments?
Before investing in alternative assets, it’s important to understand the potential trade-offs compared to traditional investments:
- Complexity: Alternative assets require deeper due diligence and market knowledge.
- Self-management of your account and investments: With a SDIRA the account owner has sole responsibility for evaluating and understanding the investments in the account.
- Increased risk: Investing in alternative assets involves unique risks that may be greater than those associated with traditional investments. Refer to IRS Bulletin for additional information regarding risks associated with SDIRAs.
- Limited liquidity (harder to sell quickly)
- Potentially higher fees and complexity
- Less transparent valuations
- Regulatory restrictions (i.e. some require accredited investor status)
There is also the risk of capital loss in alternatives, as there is with any investment.
How Forge Trust can help
Adding alternative investments to a traditional portfolio can potentially strengthen it, but accessing alternative investments requires the right custodian. At Forge Trust, we make it possible to hold alternative assets, including shares of pre-IPO, unicorn private companies, in your SDIRA, giving you control and flexibility over your retirement strategy.
If you’d like to learn more about alternative investments and SDIRAs, please visit Forge Trust’s Resources page, and if you’re ready to get started, open an account today.
Frequently Asked Questions About Investing in AI with SDIRA
What are considered alternative investments?
Examples of alternative investments include real estate, private equity and venture capital, commodities and private lending.
What are the different types of alternative investments?
Broadly speaking, alternatives fall into four main categories: real assets, private capital, hedge funds and specialty assets.
How to invest in alternative investments
Investing in alternatives can be more complex than buying a stock, bond or ETFs. Some require accreditation, high minimums or longer lock-up periods.
For retirement savers, a Self-Directed IRA (SDIRA) provides an accessible pathway. With an SDIRA, you can hold a wide range of alternative assets in a tax-advantaged account.
Why invest in alternative investments?
Key benefits of allocating capital to alternative investments may include enhanced diversification, inflation protection, plus the potential opportunity for outperformance when compared to traditional investments.
What are the risks of alternative investments?
Before investing in alternative assets, it’s important to understand the trade-offs compared to traditional investments. Alternative investments may come with limited liquidity, higher fees and minimums, less transparent valuations and regulatory restrictions. There is also the risk of capital loss, as there is with any investment.
Zander is a seasoned product leader with a 12-year history in financial technology, specializing in private market investments. His tenure includes roles at LTSE, Alto, and IHS Markit, where he focused on product management and strategy. Zander holds an MBA from Vanderbilt University, focusing on International Business, and a B.A. in Economics from Colby College.