To many investors, the world of alternative investments is one that is synonymous with secretive, hidden or unattainable assets. Confusing investment strategies or barriers to entry like having a high net worth and/or a sizable upfront initial cost only serves to make alternative investments restrictive and adds to their mystery. Other alternative investments might mean having a professional-level expertise in a specific market in order to gain access.
But for investors who may not qualify for traditional alternative investment funds, there are still plenty of ways to gain exposure.
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What Are Alternative Investments?
Alternative investments include asset classes or investment strategies that go beyond stocks and bonds or buy-and-hold portfolios. Hedge funds, private equity funds, commodities, real estate, and even art and antiques are all considered alternative investments. They may apply complex trading strategies that require large sums in order to execute properly or they might invest in an asset class that isn’t usually included in traditional portfolios or 401(k) plans.
Hedge Funds
No discussion about alternative investments would be complete without covering hedge funds. A hedge fund is a type of investment vehicle that typically requires an investor to have a minimum net worth of $750,000 along with an initial buy-in of $50,000 or more. Hedge funds can invest in a variety of asset classes including stocks, bonds, currencies, commodities, derivatives and more. They also employ trading strategies that require large sums of money to execute or in-depth knowledge of trading markets.
How to Invest:
Mutual Funds. There are a number of mutual funds that employ strategies comparable with hedge funds giving everyday investors access to the same types of active management techniques as high net worth investors.
- AQR Diversified Arbitrage Fund – ADAIX uses merger arbitrage strategies and event-driven techniques to generate absolute positive returns.
- Hussman Strategic Total Return Fund – HSTRX attempts to generate positive returns in both bullish and bearish markets.
- Waddell & Reed InvestEd Conservative Fund – WICAX seeks to keep returns positive in bear markets and boasts a proud track record of never having a year below 0%.
Private Equity
While most investors buy stocks in publicly traded companies, private equity firms specialize in investing in privately held companies. Unlike publicly traded companies that are owned by investors in the form of stock shares, private companies are inaccessible to most investors. Because they invest in companies that are not publicly traded, private equity companies tend to be illiquid investments requiring investors to have a long-term mindset.
How to invest:
- ETFs – Invesco’s Global Listed Private Equity ETF (PSP) invests in a pool of other private equity companies giving everyday investors access to this lucrative industry.
- Mutual Funds – Vanguard’s Alternative Strategies Investor Fund (VASFX) is a relatively new fund, launched in 2020, that is designed to give everyday investors access to private equity investments.
- Special Purpose Acquisition Companies (SPACs) – These publicly traded shell companies invest in private businesses in order to give them access to a public exchange without having to launch an IPO.
Commodities
Adding commodities like gold, silver, copper, corn, wheat, soybeans and many more is a great way to add diversification to your portfolio and hedge against risks like inflation. Commodities also perform well when other market sectors like stock and bonds are faring poorly making it an ideal asset class to help balance out annual returns.
How to Invest:
Stocks – There are a number of stocks that are “pure plays” on a given commodity. Mining stocks in particular are ideal if you want exposure to metals and minerals.
Mutual Funds – Investing in a mutual fund that holds a commodity portfolio allows you to gain the expertise of a portfolio manager without having to follow the commodities market yourself. Here’s a quick list of some commodity-specific funds:
- Fidelity Series Commodity Strategy Fund– FCSSX invests in commodity-linked derivative contracts to give investors a broad exposure to the commodities market.
- PIMCO Commodity Real Return Strategy Fund – PCRAX is another broad basket commodity fund that uses derivative contracts to generate returns.
- Gabelli Gold Fund Class A – GLDAX specifically invests in gold mining and exploration stocks.
ETFs – Like mutual funds, there are numerous ETFs geared towards commodity investments. Here’s a quick list of some of the best:
- Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF – PDBC offers a broad basket of commodities for investors such as oil, corn, copper, and many others.
- United States 12-Month Oil Fund – For those seeking a pure play on oil, USL tracks crude oil futures over the next 12 months.
- Teucrium Corn Fund – As a pure play on agricultural commodities, corn specifically, CORN offers investors access to a commodity segment unavailable elsewhere.
- SPDR Gold Trust (GLD) – GLD is a pure play on gold and invests in a basket of gold mining stocks.
Real Estate
As an asset class that doesn’t follow the normal trends of the stock market, real estate is a type of investment that not only generates solid returns over time, but also provides a hedge against cyclical market risks.
How to Invest:
- Real Estate Investment Trusts (REITs) –The best way of gaining some exposure to the real estate market is through a REIT. These assets are highly liquid because they can be traded like stocks and usually offer higher-than-average dividend yields as well.
- Tenants-in-Common (TIC) – In this type of real estate investment, a group of investors pool their money together to buy residential, commercial or industrial properties that generate a stream of income. This may include apartments, multi-family homes, shopping malls and more. Typical buy-in costs are usually around $10,000, although some TIC properties may require more.
You can learn more about this type of real estate investment here.
Art and Antiques
One asset class that typically gets overlooked is art and antiques. Art isn’t just for the uber rich – some investors might have a hidden gem at home they aren’t even aware of. For example, a comic book collector could have something like Journey into Mystery #83 (first appearance of Marvel’s Thor character) stuffed away in a box somewhere, completely forgotten. A mint condition copy of the issue sold for $217,000 a couple of years ago. When it first debuted in 1962, that comic book cost a mere $0.12 – an unbelievable return on investment.
How to Invest:
Unfortunately, there isn’t an art or collectibles ETF or mutual fund on the market right now. The illiquid nature of these investments and the lack of an intrinsic value make it difficult, if not impossible, for a managed fund that holds an art portfolio.
The Bottom Line
Alternative investments don’t have to be out of reach for everyday investors who want to add some diversity to their portfolios. Whether it’s mutual funds, ETFs, stocks or even an old comic book collection, investors have access to these types of investments without having to put up an enormous initial buy-in or have a net worth of nearly $1 million.
By investing in mutual funds, ETFs, stocks or something else, investors can gain exposure to alternative investments without having to meet stringent qualifications, deal with large buy-in costs, or have extensive knowledge of market-specific transactions.
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