Alternative investments are typically characterised by their lower liquidity, higher complexity, and higher risk compared to traditional investments. They often require longer holding periods and involve more specialised knowledge and due diligence. However, they can offer unique benefits such as lower correlation with traditional asset classes, which can reduce overall portfolio volatility and improve diversification.
One example of an alternative investment is private equity, which involves investing in privately held companies that are not publicly traded. Private equity investors typically seek to buy companies that are undervalued or have growth potential, and then work to improve their performance and profitability before selling them at a profit. This can provide investors with higher returns compared to traditional investments, but also involves higher risk and longer holding periods.
Hedge funds are another type of alternative investment, which are typically only available to accredited investors due to their high minimum investment requirements. Hedge funds use a variety of strategies to generate returns, including long/short equity, global macro, and event-driven strategies. Hedge funds can provide diversification and downside protection during market downturns, but can also involve high fees and limited transparency.
Overall, alternative investments can provide investors with a way to diversify their portfolios and potentially generate higher returns. However, they also involve higher risk and require specialised knowledge and due diligence. As such, alternative investments should be approached with caution and only after careful consideration of an investor's overall financial goals and risk tolerance.