Photo source: ig.com
An alternative investment generally refers to investments in any asset class other than conventional investment categories like stocks, bonds, and cash. However, what investors consider an asset has evolved over the years from real estate and commodities to art and antique collections and, most recently, non-fungible tokens(NFTs).
A trend that we observe is that those able to withstand the test of time generally have 3 things in common – low correlation with traditional investment options, variable intrinsic value, and tangible.
Photo source: nypost.com
“Onement VI” An abstract work of art by Barnett Newman which sold at $43.8 million in 2013.
1. Low Correlation with traditional investment options
Alternative investments generally have a low correlation with traditional investments like stocks and bonds. This means that they often move counter to the stock and bond markets, offering great diversification benefits to investors’ portfolios.
Often, alternative investments appreciate based on the strength of the specific investment so they are much less affected by broader market trends. Gold, for example, is the best-known hedge when global equity markets are trending downwards as most investors view the finite precious metal as the go-to option when investors prioritizes capital preservation during economic downturns.
Photo source:Heritage Auctions, HA.com
Justh & Hunter Gold Ingot, 866.19 Ounces, the largest S.S. Central America ingot ever offered at an auction
2. Variable intrinsic value
As with any class of investable asset, scarcity is key for value appreciation. However, what makes valuing alternative assets difficult is that it often requires industry-specific knowledge and that demand patterns are usually inconsistent, making the barrier of entry high for inexperienced investors.
It is certainly much harder to price a handmade piece, Space Traveller’s Watch I by George Daniels which sold at £ 3,615,000 back in July 2019, as compared to 1000 shares of Amazon.com, Inc. trading in the Nasdaq stock exchange since the valuation models taught in finance schools around the world generally provides a reasonable consensus estimate of the price per share of Amazon’s stock but how many of us actually recognise the piece below?
Investments in hard assets usually act as a hedge against the dreaded inflation which erodes the purchasing power of money. The success of Masterworks, a platform that allows investors to buy shares of an artwork, proved a shift in trend as investors are moving away from traditional options like gold, oil, and real estate. Some tangible alternative investments that are trending among investors now are fine art, fine wines, antiques, and stamps.
The idea of alternative investments being tangible also seems to appeal to investors or avid collectors as there is great significance to owning the “real thing” especially if the asset is extremely scarce in today’s world.
Alternative investments are definitely getting popular, especially among high-net-worth individuals, moving from the periphery of the global investment landscape into the mainstream. In just 15 years, the market share of alternative investments grew from 6% to 12% or $13.4 trillion of the global market in 2018, and they are expected to grow to between 18-24% of global assets by 2025.
If you haven’t been keeping up with the trends but do not want to miss out on the potential benefits alternative investments can bring you, don’t fret. Every valuable investment starts with a single courageous step!