Alternative investments explained: A beginner's guide
An overview of alternative investments, potential risks and rewards, and how to balance them with your cash savings.
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Key takeaways
Alternative investments are assets that fall outside traditional categories like stock market shares, standard bonds, and cash savings.
Popular alternative investments include private equity, private debt, real estate, hedge funds, and physical commodities.
While these investments can help diversify your portfolio and protect against inflation, they often involve higher risk, complex fees, and lock up your money for long periods.
What are alternative investments?
Alternative investments are financial assets that fall outside the traditional categories of publicly traded stocks, bonds, and cash. Because these investments don't trade on the standard stock market, they often follow their own price trends, can be harder to sell for quick cash, and face different government regulations.
Unlike conventional stocks or index funds, an alternative investment cannot always be easily sold or converted to cash on demand. Historically, access to these investments was limited to big institutions and wealthy individuals who met specific income or net worth requirements. While new digital platforms have made it easier for everyday savers to participate, alternative investments remain very different from traditional cash and stock holdings.
Traditional investments vs. alternative investments
Understanding the structural differences between traditional and alternative asset classes helps investors evaluate liquidity, volatility, and regulatory oversight:
Feature | Traditional investments (stocks, bonds, cash) | Alternative investments (private equity, real assets, debt) |
Access to funds | High (you can sell stocks or withdraw cash almost instantly). | Generally low (your money may be locked up for months or years) |
Regulation | High government oversight and strict public reporting | Often subject to reduced reporting standards and lighter SEC oversight |
Market correlation | Closely tied to the broader stock market and economy | Often moves independently from the daily stock market |
Accessibility | Available to individual and institutional investors | Traditionally targeted toward wealthy investors and big institutions, though everyday access is growing |
Pricing transparency | Real-time, public pricing (you always know exactly what it's worth) | Periodic appraisals or internal estimates (it can be hard to know the exact value on any given day) |
What are the main types of alternative investments?
Alternative investments encompass a diverse range of assets, each with distinct risk profiles, holding periods, and liquidity terms. The primary categories include:
1. Private equity
Private equity involves capital invested directly into private companies that are not listed on public stock exchanges. Private equity strategies generally fall into three main subclasses:
Venture capital: Focuses on early-stage startups and emerging businesses with high growth potential.
Growth capital: Involves funding mature, established private businesses seeking capital to expand operations or restructure.
Buyouts: Entails purchasing an entire company or subsidiary, often utilizing a mix of equity and debt (leveraged buyouts) to take operational control.
2. Private debt
Private debt refers to financing provided to private or public companies by non-bank entities rather than through open public bond markets or commercial bank loans. Investors participate via private credit funds or peer-to-peer lending platforms, generating potential returns through routine loan interest payments and eventual principal repayment.
3. Hedge funds
Hedge funds are pooled investment vehicles that trade a variety of assets using specialized, active strategies. These funds frequently employ techniques such as long-short equity, leverage, derivatives, and market-neutral positioning. Historically, hedge funds require high minimum investments and are generally restricted to institutional investors or accredited individuals.
4. Real assets: Real estate, commodities, and collectibles
Real assets derive their value from their physical properties and tangible utility:
Real estate: Investors can purchase physical commercial or residential properties, or access the market through Real Estate Investment Trusts (REITs), real estate mutual funds, and crowdfunding platforms.
Commodities: Tangible raw materials — such as agricultural goods, crude oil, natural gas, gold, and copper — that often serve as an inflation hedge driven by supply and demand dynamics.
Collectibles: Physical items such as fine art, classic cars, rare coins, and luxury watches. Collectibles generate no ongoing cash flow and depend entirely on future capital appreciation upon sale.
5. Structured products
Structured products are pre-packaged investment strategies typically created by investment banks. They combine traditional securities with derivatives to create customized risk-return profiles linked to underlying benchmarks, equities, or currency pairs.
6. Digital assets and cryptocurrencies
Cryptocurrencies and digital tokens represent a newer subclass of alternative assets. Characterized by high price volatility and market risk, digital assets operate outside the conventional banking system and do not carry federal deposit insurance protections.
Advantages and disadvantages of alternative investments
Potential advantages
Portfolio diversification: Because these assets don't follow the stock market, they can help smooth out the bumps when traditional stocks drop.
Potential return premium: Certain alternative investments offer the potential for higher returns to compensate for long holding periods and illiquidity.
Inflation protection: Physical assets like real estate and commodities frequently adjust upward during inflationary environments.
Potential disadvantages
Limited liquidity: Many alternative vehicles require multi-year lockup periods where capital cannot be withdrawn on short notice.
Higher fees: Management fees and transaction costs in alternative funds are usually much higher than those of standard mutual funds.
Valuation complexity: Lacking a daily public exchange, calculating accurate net asset values often relies on estimates and intermittent appraisals.
How to invest in alternative assets
Investing in alternative assets depends on the chosen vehicle. Wealthy individuals often access private equity and hedge funds directly through wealth advisors. Everyday investors can gain exposure to alternatives through publicly traded real estate funds (REITs), commodity exchange-traded funds (ETFs), or specialized digital crowdfunding platforms.
Before allocating capital to illiquid assets, many savers prioritize establishing a stable cash reserve.
How Raisin can help you build your safety net
Because alternative investments can lock up your cash for years, maintaining a reliable, easily accessible cash safety net is critical. Raisin provides a digital marketplace connecting savers with high-yield savings accounts and certificates of deposit from a nationwide network of partner banks and credit unions.
Frequently asked questions
Who is eligible to invest in alternative assets?
Historically, many private funds required you to be an "accredited investor" (meaning you have an individual income over $200,000 or a net worth exceeding $1 million, not counting your house). However, new crowdfunding platforms and publicly traded real estate or commodity funds now allow everyday savers to participate without meeting those strict wealth requirements.
What portion of a portfolio is typically allocated to alternatives?
It depends on your risk tolerance and how much cash you need easy access to. Big institutions might hold 10% to 30% of their money in alternative assets, but everyday investors usually keep a much smaller percentage to avoid locking up too much of their cash.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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