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Ever since the 2008 financial crisis, global markets entered an era of easy money with central banks around the world keeping benchmark interest rates low to fuel economic growth.
Alternative investments have since gained popularity among investors as traditional means of investing like bonds and stocks are historically expensive and have proven that they are no longer as reliable as before. In today’s context, alternative investment options can be considered to be a staple in a significant number of portfolios. The sector accounted for 12% of the global investment market in 2018, double that of 2003, according to reports from the Chartered Alternative Investment Analyst Association (CAIA).
But why exactly are alternative investments gaining attention and what makes them so attractive?
Here are 3 reasons investors are flocking to alternative investments today:
The most obvious reason for considering alternative investments is the diversification benefits that it brings. Diversifying your investment portfolio can reduce portfolio risks but maintain expected returns.
This is largely attributable to the fact that alternative investments are found to have a low correlation to the stock and bond markets and generally move in contrasting directions to traditional investments.
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2. Higher Returns
Alternative investments tend to have higher rates of return than stocks and bonds, as pointed out by Harvard Business School. Most definitely, this will mean that alternative investments carry slightly higher risks due to their niche markets which makes them difficult to value and analyze.
This may be the primary reason why alternative investments can appreciate really quickly as well. Would you believe that bottles of 95-year-old sold at prices between $1 million to $2 million dollars at recent auctions as prices were spurred by Asian investors?
However, it is also important for us to know that nobody can guarantee positive returns, especially when it’s a non-traditional investment.
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3. Current Global Market Outlook
Lately, with record high inflation figures, the Russian-Ukraine situation and the global economy only recently recovered from the Covid-19 Pandemic. The US federal reserve’s aggressive stance had many investors predicting a global financial crisis no later than 2023. In 2022, most traditional investment options are performing poorly with the current economic headwinds.
Photo source: The New York Times - S&P500 Falls into Bear Market
Yes, you’ve guessed it – Alternative Investments. The most preferred few are usually tangible collectors’ items like fine art, antiques, and more recently, fine wine. What’s yours?