After the equity market crash of 2022, individuals who had previously heavily relied on traditional investments saw the value of their investments plummet, leading many to look into the world of alternatives.
Alternative investments tend to have a low correlation with traditional assets, meaning they trend in opposite directions. This makes them wise additions to the portfolios of investors who are looking to diversify, spread out risk, and increase returns.
Emerging asset classes
“Both from globalisation and from increasing ideas and technology, there are always new opportunities to make money. That’s what makes the world of alternatives so exciting because those new ideas for making money are almost always going to be couched in the language of alternative investments.” — Randolph Cohen (Harvard Business School Professor).
Let’s discuss few of the most exotic emerging spaces to invest in:
Fine Art: Art has been a way to showcase one’s wealth. A perfect artefact that is unique, made by a world-famous artist, and in certain scenarios considered a well-known creation, will offer the bidder quite the thrill once the hammer drops at auction. Own paintings for a lower amount at auctions and sell them to the person who falls in love with them.
Music Royalties: Music royalties are how people in the music business get paid. A royalty is a payment to the person or group that owns the copyright to a piece of music. Help an artiste in making his song, own certain rights over the music royalties and you get to earn every time that song is played.
Equipment Finance: Every business needs some kind of equipment to operate and grow, but the price of some items can easily top six figures. That’s where equipment finance comes in: A company can get a loan or lease for almost any type of physical equipment, apart from real estate. As equipment-dependent industries grow, so does equipment financing.
Returns and risks
The overall market for alternative investments could grow to $14 trillion by 2023, according to a report by Preqin, a data intelligence provider. Alternative investments typically don’t correlate to the stock market, which means they can be used to add diversification to a portfolio and help mitigate volatility. Some can also offer tax benefits not available in traditional investments.
Alternative investments are more complex than traditional investment vehicles. They often have higher fees associated with them. As with any investment, the potential for a higher return means higher risk. Unlike public equities, alternative assets are not traded publicly, meaning there is not an open market of buyers and sellers available to investors.
The right mix for investing
Allocations to alternatives are believed to increase a portfolio’s risk-adjusted return. Finding a good balance between risk and return is the first aim of any investment strategy. Modern portfolio management theory suggests diversification, so as to cope with the volatility of the market and to reduce the risk in a portfolio.
While the allocation relatively varies for investors, it is advisable for investors to allocate 25-30% to achieve maximum diversification of their portfolio. It may therefore create significant added value.
(Chitra Kadam is Financial Engineer, Currency Trading at Hedonova)
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