Examples Of Alternative Investments And How They Work

الخميس، 25 فبراير 2016

By James Collins


Most people thinking about investment have bonds, stocks, exchange traded funds, stocks and pre-packaged categories, among others in mind. These options are limited in their returns because of market volatility and risks involved. There are fantastic examples of alternative investments whose rate of returns is impressive without exposing you to major risks. These alternative investment options are becoming accessible to the public, unlike in the past.

Private equity firms, unlike listed companies are traded in boardrooms. They have diverse investments in different markets which they also use to raise funds for their projects. Private equity firms make their money through venture capital investment, growing other companies or investing in start-ups. They deduct management and performance fees before releasing the gains to investors. The money invested reverts back through IPOs or profits from the funded companies.

Another excellent example of alternate investment is direct investment in private companies. The investor provides seed capital to the firm through angel investing. Direct investment is similar to assisting start-ups to grow. The rate of return is not predictable. While some start-ups perform well, others fail leading to heavy losses. A small time investor is also capable of putting money directly into a company because not all start-ups require thousands of dollars.

Venture capital is a thriving investment segment if properly managed. The capitalist invests in a growing company at the early stages. Such companies are running excellent small scale businesses and require the funds to scale operations. Unfortunately, these funds are not available in the ordinary market because the firms lack records or a portfolio to support their demand. Since these are ideas, they might fail leading to huge loses.

Real assets are another attractive investment option for those avoiding the common platforms. It is largely driven by prestige and the guaranteed security that comes with these assets. The options available in this category include prime agricultural land, rare coins, real estate and precious metals. Others are holding rare wine, art and baseball cards. The investment can be done directly or through a specialized trading company.

Hedge funds are an easier and more liquid version of private equity. The difference is in their areas of investment. Their strategy targets arbitrages, distressed assets, macro-trends and equity long-short. Their frequency of redemption and liquidity is greater which means that investors can easily get their money. It is the hedge fund managers who raise money for their firms.

The returns emanating from debt investment are drawing more people towards this segment. These debts are not rated by credit agencies or traded publicly. Debt traders ensure that private firms have a steady cash flow to sustain their operations despite over supply or over acquisition. Debts are traded through promissory notes and mezzanine debts. The company will pay a commission over the amount forwarded once the debt has been settled.

Spreading the risk and investing in areas that provide better cover from losses is what makes alternative investment attractive. Caution should be exercised whenever you wish to invest directly and as an individual. Risk factors still remain, some of which are fatal. Real assets are attractive because of the prestige associated with these investments as opposed to the margins of returns.




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