Alternative investments are used by many investors to hedge against losing money due to something such as government regulations or international markets falling into chaos. All investors should have some sort of plan in place if the market drops significantly. However, it is important to note that not every investor should consider alternative investments as part of their portfolio. If an investor does not have a great grasp of the basic concepts behind investing, they may need to hire a qualified alternative investment expert like those available for hire on the Fintalent platform.
What are alternative investments?
Alternative Investments are investments outside of traditional investment options such as stocks, bonds, mutual funds, or 401ks. The most common alternative investments include real estate and commodities like precious metals. These industries have historically been overlooked by the majority of investors because of their perceived volatility. However, Fintalent’s alternative investments consultants observe that with the current climate in which major banks are failing and credit markets are increasingly volatile, many people are beginning to turn to alternatives for their portfolio diversification in order to hedge against downside risk that can be associated with these traditional investment opportunities as well as put a small amount of money towards alternative assets since they operate outside traditional financial channels.
What is an alternative investment company?
An alternative investment company is a type of financial institution which specializes in investments that are not mainstream, such as angel investing and venture capital. These firms usually offer an interest rate higher than the rates found on bank deposit accounts.
The growth of these firms is due to the increased amount of money in investments, especially in recent years. They also have a wide range of investment opportunities for potential investors because there are no barriers as it does not require you to meet certain requirements or have credit worthiness.
Traditional Investments (i.e. common stock, mutual funds, etc.) – Similar to putting your money in the bank, traditional investments provide a safe bet with a minimal risk of losing money invested. This is appealing for investors looking to keep their capital safe and avoid losses from unforeseen events or circumstances that could impact the value of their investment. However, there is little potential for large financial gains as well – guaranteed interest rates don’t offer significant financial rewards as they are regulated by the government and therefore cannot vary much from an average below market interest rate.
Alternative Investments i.e. hedge funds, hedge funds, private equity, etc. are not exactly the same as traditional investments in that they can provide investors with greater financial rewards and therefore potentially more profits or loss but with a higher risk of losing money invested than with traditional investments. This is due to the fact that many alternative investments are carried out by professionals such as investment professionals who have a more diverse portfolio of investment opportunities and therefore more volatile investing environments resulting in a higher risk-reward ratio than others not carrying out the same activities.
Hedge Fund – A hedge fund is essentially an investment firm that uses leverage to profit from your money by leveraging actual securities from major companies or government bonds (among many others). The funds are usually run by professionals and can consist of a combination of stocks, commodities, futures, debt instruments and other securities which are then traded back to the fund.
The main concept of these investments is that the investment firm is able to leverage the funds and make money by investing in many different markets for example a hedge fund could be leveraged with 70:1 on major market stocks or 10:1 on government bonds. This allows for a high amount of financial gains for investors as this type of leverage will allow them to multiply their money by a large amount if successful.
This can be dangerous for an investor if the opposite were to happen as the fund would have to sell assets to meet the debt that has been taken out and if the underlying assets had dropped in value it will result in significant losses for investors.
Private Equity – Private equity funds work very similarly as hedge funds in that they are usually managed by professionals and leverage your money to provide a return on investment capital. However, this is done differently than a hedge fund: instead of investing directly into stocks via their positions, whereas a private equity firm makes direct investments into companies either through stock purchase or debt financing (which means taking over the company’s majority share via debt instead of stock).
Private equity firms leverage their assets to create more money for the firm and therefore provide a higher return percentage on investment capital.
One of the biggest advantages of some of these investment management firms is that they are able to make better investments than others in other companies not just on the financial market but also industry trades and business opportunities that may be in their favour. This is why they are called alternative investments in securities as they invest into markets not found on the stock market and make investments that don’t look like traditional stocks or bonds. As with all alternative investments there is still a possibility for a large amount of financial losses but this will be greatly reduced compared to traditional investments.
Techniques for alternative investments
Alternative investments in firms can be made with a variety of different techniques;
Hedge Fund – In a hedge fund the investment firm positions themselves with more money than they actually have which is then used to invest into other companies or markets. For example, if an investor has $100 and wants to increase his return by 5%, he will usually buy “a 1X closed end fund” that means that the total value of the portfolio is $100 but the investor invests 10% of his capital (which is $10) and therefore has a 1:1 leverage meaning he can make 10% return compared to what he would have received had he invested $10 into a stock market index. However, if the share prices drop or the company falters then both investors will lose out and therefore it is important to make sure that the sufficiency of capital is taken into account as well.
Private Equity – In a private equity firm there is usually a very high amount of capital put in compared to traditional financing methods and therefore there is a much higher chance of being able to invest into companies from a diversified portfolio. However, this also increases the riskiness factor of these investments as it can be difficult to raise major amounts of money that could give investors over 80% returns with only 20% risk.
All three of these investments have different advantages and disadvantages but they all have the same goal which is to allow investors to maximize their return on investment capital. With these alternative investments a large return on investment can be achieved with a high degree of risk.