Are you someone who is seeking to invest outside the traditional markets of stocks and bonds?
Maybe you’ve heard about something called alternative investments?
These investment vehicles are sometimes hard to define, and many have their own definitions. But in general, it’s things that fall outside the stocks, fixed income, or cash domains.
In recent years many new innovations have been added under the alternative assets umbrella. Things like NFTs, cryptocurrencies, peer-to-peer lending and others.
More and more investors are seeking them out, in hopes of boosting returns, diversifying, and generating income. Read on to find out more about this sought after asset class.
Let’s start with a few interesting key stats:
- Assets under management in alternative investments set record in 2020
- Digitization is expected to disrupt the alternative investments industry
- Picasso continues to be the leading artist globally by auction revenue in 2020
- China has the biggest market share of fine art auctions worldwide in 2020
Note on the definition: The term alternative investments is still a rather loose term, encompassing a broad range of assets, both tangible and non-tangible. The main purpose of the term is to contrast these type of investments with traditional investments.
What are Alternative Investments?
An alternative investment is simply one that does not fit into the traditional investment categories such as stocks, bonds, and cash. They are things like:
- fine art and antiques
- private equity or venture capital
- hedge funds
- physical real estate
- real-estate crowdfunding
- infrastructure
- peer-to-peer lending
- commodities (precious metals, oil, gas, corn, etc.)
- structured products like credit derivatives
- online businesses
- cryptocurrencies
- farmland
- jewlery
- wine
- collectibles
- storage units
- and others.
Most of these investments are not regulated by the Securities and Exchange Commission and tend to have a somewhat illiquid characteristic to them. And while historically retail investors couldn’t get their hands on this type of investment as easily, these days investing in them is made much easier through financial vehicles such as alt funds, ETFs and mutual funds.
How to buy into Alternative Investments?
As people increase their incomes and generate wealth, they start looking for ways to preserve their money. The stock market is typically presented as the go-to option, but many people will also go with some of the alternative investments outlined above, as a way to diversify or hedge against the volatility, and sometimes generate higher returns than the conventional route.
There are many ways to start investing in alternative investments, as mentioned above many brokers now offer mutual funds called alt funds, which pool money to invest in things like global real estate, start-ups, and various commodities such as oil and gold. Alternatively, when it comes to real estate, there are many different crowdfunding platforms to choose from, such as:
- DiversyFund
- Fundrise
- Groundfloor
- and Peerstreet.
With fine art however, you traditionally had to have been pretty wealthy and be ‘in the know‘, as the circles were kept pretty tight. But nowadays with platforms such as Masterworks, which allow retail investors to purchase shares in fine art akin to shares in a public company, individual investors are given easier access to a traditionally top performing asset class.
As far peer-to-peer lending (P2P) goes, platforms such as LendingClub and Porsper directly connect lenders and borrowers. Another type of alternative investment is buying or investing in online businesses, and marketplaces like Flippa and Empire Flippers allow you to buy and sell them, whereas things like ChiefOperators(.io) will allow you to passively invest into websites with expert operators.
Crypto is everywhere these days and Coinbase is one of the most popular platforms investors gravitate to for buying cryptocurrencies. If you’re thinking of investing in farmland, a platform called AcreTrader is marketing attractive yields of 11% (ARR) to would be investors.
There are many other platforms and ways to invest in alternative investments, but before you invest into any of them make sure you have an investment objective, an understanding of the strategy a fund uses, what their operating expenses are, as well as what their performance history is like and who the fund manager is. Otherwise they can be a great diversification option!
Interesting facts and stats on Alternative Investments
1. Assets under management in alternative investments set record in 2020
(Source: Pensions & Investments Online)
Despite a year-over-year decline in fundraising, manager’s of alternative investment funds reported a 5.1% growth of assets under management for an all-time high of $7.4 trillion in 2020.
2. Asia is expected to experience explosive growth in alternative investments
(Source: Preqin)
By 2025 the alternative investments in Asia is expected to go through explosive growth, with assets under management (AUM) forecasted to reach $6 trillion dollars. Asia-Pacific private capital AUM has already grown almost 6-fold over the past 10 years to $1.71 trillion in Q4 2020, raising $133 billion in 2020 alone! While hedge fund investments for the same region were at $156 billion as of Q4 2020, which brings the region to a near $2 trillion milestone for alternative investments.
3. Digitization is expected to disrupt the alternative investments industry
(Source: KPMG/CREATE-Research Survey)
53% of hedge funds and private equity firms surveyed in 2018 by KPMG International and CREATE-Research expect digital innovation to have a partial disruption impact on the alternative investments industry in the coming 10 years, and another 10% believe alternatives will experience full disruption.
4. Special Purpose Acquisition Companies grew 509% in raised funds from 2019 to 2020
(Source: JP Morgan)
The amount SPACs raised in 2019 was $13.6 billion through 39 SPACs, in 2020 that number shot up to $82.8 billion raised by 248 SPACs. These companies are known as ‘blank check companies‘, a SPAC raises funds through an Initial Public Offering (IPO) with the goal of then acquiring and hopefully growing an already existing company that could use a cash injection to scale.
5. Assets under management for the alternatives class is projected to reach $21.1 trillion by 2025
(Source: PwC Asset and Wealth Management Research)
Interest in this investment class is projected to grow at a significant rate, forecasted to almost double from 2017’s $11.2 trillion to 2025. Real-assets, which include infrastructure and real estate are expected to be the fastest growing alternative investment.
6. Picasso continues to be the leading artist globally by auction revenue in 2020
(Source: Statista I)
At $245 million, Pablo Picasso fine art leads the way in auction revenue globally, followed by San Yu at $163 million, Zao Wou-Ki at $158 million, and Zhang Daqian at $138 million. The sheer dominance of Picasso on the art market shows why you’ll often hear the name Picasso continuously be used as a synonym for fine art.
7. China has the biggest market share of fine art auctions worldwide in 2020
(Source: Statista II)
China generated an approximate 39% of the total global fine art auction revenue, The United States about 27% and the United Kingdom around 15%. These auctions include sculptures, photographs, drawings, videos, prints, installations, tapestries, etc. But they exclude anonymous cultural goods, antiques, and furniture.
8. Global online art and antiques sales exploded to $12.4 billion in 2020
(Source: Statista III)
Jumping from $6 billion in 2019, the total sales in 2020 roughly doubled, as the COVID-19 pandemic completely changed the landscape and forced art dealers and auction houses to innovate and find an alternative to in-person events. It is unlikely to last, however, as only 15% of people said they prefer to buy art online. Who can blame them? The most common fine art bought online in 2020 were paintings, prints, drawings, and photographs.
9. Non-fungible tokens (NFT) sales continue to increase significantly
(Source: Statista IV)
NFTs are unique digital assets which are stored in blockchain. They are used to demonstrate or prove authenticity of digital artworks. They’re usually classified as crypto art. For the trailing 30 days in April 2021, roughly 23.7 thousands NFTs were sold. Just two months later as of June 15th, 2021, the number skyrocketed to over 90 thousand. Between May 2020 and April 2021 the total sales amount of NFTs sold on the Nifty Gateway marketplace was at $303.8 million dollars.
10. Global peer-to-peer lending market size is projected to grow at 29.7% annually from 2000 to 2027
(Source: Allied Market Research)
Peer to peer lending removes the middle man, typically a bank or some other financial institutions, and lets individual lenders lend money to individual borrowers. The global market for this type of lending was at $67.93 billion in 2019 and is projected to grow at an compound annual growth rate of 29.7% from 2020 to 2027, at which point it is projected to reach $558.91 billion dollars.
Note on the numbers used in the article: In an effort to paint a fuller picture, the figures in this article were aggregated from numerous credible sources, who reported the results of their surveys at various points in time.
Parting Words
Glad you made it to the end, hope you’ve learned something along the way!
At the end of the day, there many types of alternative investments to choose from, some much more complex than others. Some continue to be out of reach to individual investors without a huge net worth, others are more much more accessible to all. Some require your investment to be ‘locked-up’ for a long period of time, other are much more liquid and you could exit your position at any point in time.
Alternative investments are something to consider if you’re looking to diversify your portfolio and to gain exposure to unique investments. Finally, as with any prudent investment decision, you should first research the investment in-depth before investing your hard earned money.
Sources
Pensions & Investments Online | Preqin | KPMG/CREATE-Research Survey | JP Morgan | PwC Asset and Wealth Management Research | Statista I | Statista II | Statista III | Statista IV | Allied Market Research | United States Department of Agriculture |
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