What are alternative investments?

Over the last several decades, alternative investments have grown from a niche asset class into a more prominent market segment, one that can provide some unique benefits over the long term. However, while interest in alternative investments has grown in recent years, they still carry substantial risk, can be complex in their structure and, as such, are not necessarily suitable for all investors.

An Ameriprise financial advisor can help you decide whether alternative investments make sense for you and provide recommendations on which assets may fit your needs, financial goals and long-term investment strategy.

Here’s a guide to the pros and cons of alternative investments, and how this unique asset class may fit into your portfolio:

What are alternative investments?

Once a catchall for investments that didn't fit into traditional categories of stocks, bonds or cash investments, alternative investments is a term to describe a range of investment strategies and structures that are typically illiquid over the long term and designed to exhibit little to no correlation to traditional equity and fixed income markets. Alternative investments are generally more complex than assets in a more traditional portfolio and can be an appropriate investing solution for investors who have high levels of capital and more sophisticated needs.

What are examples of alternative investments?

Alternative investments can encompass a variety of asset types found in both public and private markets:

• Private equity: Equity in a privately held company
• Private debt: Debt investments not held by a bank or traded on the open market
• Hedge funds: Investment funds that primarily trade illiquid assets
• Real estate: Non-traded real estate investment trusts (REITs), land, buildings and other structures as well as 1031 exchanges
• Commodities: Real, physical assets, such as agricultural products, oil and precious metals
• Collectibles: Physical items such as artwork, cars and wine
• Intellectual property: Intangible assets that can include anything from patents to creative works, such as film, music catalogs or nonfungible tokens (NFTs)

Learn more: 5 real estate investing strategies for building income and wealth

The pros and cons of alternative investments

If you're wondering whether alternatives are appropriate for your portfolio, it’s important to know the risks and benefits.

The pros of alternative investments

• Enhanced growth and income opportunities: A core reason investors look to alternative investments is their potential for enhancing portfolio returns. By providing exposure to a broad range of assets, alternative investments can help investors achieve growth or access sources of returns that are not tied to the broader equity and bond markets. Alternative asset classes such as private credit or private real estate, for example, look to generate income with the potential for higher levels than traditional fixed income markets, while private equity or hedge funds seek to generate higher long-term capital appreciation than what you might find in public markets.
• Diversification: Because some alternatives exhibit little to no correlation to traditional equity and fixed income markets, they can be an option for those looking to diversify their portfolio to mitigate risk and hedge against volatility. Due to their potential for above-average returns, they can also help hedge against some of the more conservative assets in a portfolio.
• Tax advantages: Some alternative investments may help mitigate or defer the impact of capital gains tax liabilities. For example, REITs are typically held for longer than 12 months and are therefore subject to favorable long-term capital gains rates. Assets such as exchange funds and 1031 exchange offerings are also structured to provide specific tax benefits.

The cons of alternative investments

For all their benefits, it’s important to note that alternative investments come with risks to investors:

• Significant capital requirements and illiquidity: Alternative investments are long-term, illiquid investments and typically have significant capital requirements.
• Complexity and limited transparency: Alternative investments tend to be more complex than other assets. They are typically non-public offerings that may provide limited transparency, impose higher fees and include the use of leverage and other speculative strategies.
• Additional risks: Alternative investments may have more risks compared to other registered securities. It is important for investors to read offering documents to understand the risks associated with an alternative investment.

Are alternative investments right for your portfolio?

Your Ameriprise financial advisor can help you understand the potential benefits, fees and risks associated with specific alternative investments to decide if these strategies reflect your risk tolerance and support your overall financial goals.