Alternative Investments: Expanding Beyond Stocks and Bonds

Let’s explore some common alternative asset classes:

These are tangible assets like raw materials (gold, silver, oil) and agricultural products. Studies show they often hold their value or may even increase during periods of inflation. They also tend to have a low or sometimes negative correlation with traditional investments like stocks and bonds, such that, when those markets dip, commodities might perform differently, which could help to reduce overall portfolio volatility and risk.

Commodities are often seen as a possible hedge against inflation and market uncertainty because their prices can rise, even during tough times. That said, commodities are still very sensitive to geopolitical events and changes in global supply and demand.

Real-estate investments can take two broad forms:

• Direct ownership — i.e., buying a physical apartment building or commercial office space. Here you collect rent, assume responsibility for maintenance, property management, and are exposed to changes in property values and tenant demand.
• Indirect exposure — e.g., investing in a publicly traded Real Estate Investment Trust or an income trust that holds properties (or infrastructure) and pays out distributions to investors. For instance, a REIT might own a portfolio of warehouses, retail centres, and office buildings; it leases them to tenants, collects rental income, pays expenses, and then distributes most of the remaining income to its shareholders. Because of this structure, REITs are often used by investors who want ‘real-estate exposure’ without managing properties themselves.

These vehicles can provide steady income streams (from rents or interest on mortgages) and capital-appreciation potential (if the underlying properties or land increase in value). However, there are risks / sensitivities to keep in mind. Real-estate value and rental income depend on economic conditions (employment, consumer spending, business demand for space). If the economy slows, tenants may vacate, rents may fall. Additionally, if interest rates rise, borrowing becomes more expensive (for property owners and REITs), discount rates go up (reducing valuations), and investor capital might shift to other income assets.

These are pooled investment vehicles that use a wide range of active strategies to try to generate strong returns, regardless of whether markets are going up or down. These strategies can include: betting on stocks to rise or fall (known as long/short equity), taking advantage of price differences in related assets (arbitrage), and using borrowed money to increase potential gains (leverage).

Unlike mutual funds or ETFs, hedge funds are typically only available to institutional or high-net-worth investors. They often charge higher fees, may offer less transparency, and may have restrictions on when investors can take their money out. Despite these drawbacks, hedge funds aim to provide diversification and performance that doesn’t always move in line with traditional markets.

Currency trading — also known as foreign exchange — involves buying one currency while simultaneously selling another to profit from fluctuations in exchange rates. It is the largest and most liquid financial market in the world, operating 24 hours a day across global financial centres.

Potentially high returns come from leverage (controlling large positions with small capital) and volatility, which creates trading opportunities.

However, these same factors make forex trading risky. Leverage can amplify losses, and exchange rates are influenced by complex factors such as interest rates, economic data, geopolitical events, and central bank actions, which can cause rapid and unpredictable moves.

These are digital or virtual currencies, like Bitcoin and Ethereum, secured by advanced encryption (cryptography). They can offer the chance for high returns, but they can also be very unpredictable.

They are typically decentralized, meaning they operate without a central authority like a government or bank. Their potential for high returns stems from rapid technological innovation, scarcity, and speculative demand, as prices can rise quickly when investor sentiment is strong.

However, cryptocurrencies can carry significant risks from regulatory changes, security breaches, and market speculation. They also do not produce income or dividends, so their value depends solely on what buyers are willing to pay.

Derivatives are financial instruments whose value is derived from the price of an underlying asset — such as stocks, bonds, commodities, interest rates, or currencies. Common types include options, futures, forwards, and swaps. They are widely used by both institutional and individual investors for hedging (to protect against price movements) or speculation (to profit from anticipated changes). Because derivatives involve leverage, they allow investors to control large positions with limited capital.

However, this leverage also means losses can exceed the initial investment if markets move unfavorably. Other risks include complex pricing, counterparty default in over-the-counter markets, and improper use without sound risk management.

• Diversification Benefits: Alternative assets tend to have low correlation with traditional markets, which means adding them to a portfolio can help reduce overall volatility and potentially smooth returns over time.
• Access to Unique Opportunities: Investing in alternative assets can provide exposure to markets and strategies that are not available through conventional asset classes.
• Potential for Enhanced Returns: Some alternatives, like hedge funds or private equity, aim to generate returns independent of market direction, which can potentially boost portfolio performance in different economic environments.
• Inflation Hedge: Assets such as real estate and commodities. can act as a hedge against inflation because their values tend to rise when prices increase.
• Income Generation: Certain alternatives, including income trusts and real estate, may offer steady income streams through rents or distributions, which can complement dividend income from stocks.

Despite their potential benefits, alternative investments may not be suitable for everyone. Investors should be aware of the following:

• Complexity: Many alternatives require a deep understanding of how they work. Without proper research or advice, the risks may outweigh the rewards.
• Liquidity Constraints: Unlike stocks and ETFs, some alternatives — such as private equity or real estate — may involve lock-up periods meaning you cannot sell or withdraw your investment for a set time, which can last several years. This results in your money being tied up and inaccessible if you need cash or want to exit early. Additionally, these alternatives may have infrequent trading windows, allowing you to buy or sell only during specific, limited times — such as quarterly — reducing your ability to react quickly to market changes or adjust your portfolio.
• Higher Costs: Alternatives can carry management and performance fees that exceed those of traditional investments, potentially reducing overall returns.
• Limited Transparency and Regulation: Some alternatives such as hedge funds are less regulated and may lack consistent reporting standards, increasing risk exposure.
• Market and Strategy Risk: Certain alternatives, especially speculative assets like cryptocurrencies or leveraged derivatives, can experience sharp price swings or losses.

Alternative investments can be a valuable part of a balanced portfolio because they offer diversification, unique opportunities, and possible mitigation against inflation. However, they also tend to be more complex, less liquid, and may carry higher risks. It’s important to carefully consider these factors and use research tools and screeners to find funds that give you access to alternative sectors. Combining this with analyst insights and real-time market data can help you decide how alternative investments fit with your personal goals and risk tolerance.