Background
Technically speaking, an alternative investment is any valuable asset that isn’t a stock, bond, or cash. It’s a broad term—examples include everything from fine art and vintage cars to venture capital and real estate.
However, all alternative investments tend to share a few key characteristics. For instance, they aren’t typically traded on the stock market, and they’re often less regulated and liquid than traditional investments like stocks and bonds, carrying unique risk, return, and tax considerations.
Investors often use alternative investments to diversify their portfolios and hedge against market volatility, given alternatives typically have a low correlation with traditional assets and tend to trend in the opposite direction (why invest in alternatives?).
Many alternative investments are only available to accredited investors or high-net-worth individuals, and some have relatively high fees compared with traditional investments. See more pros and cons here.
Examples
Experts often classify alternative investments under a few different categories. The collectibles category, for instance, includes a wide range of alternative investments, such as fine wines, vintage cars, and diamonds—mostly tangible, physical items that people purchase in hopes that they’ll increase in value over time.
The private equity category of alternative investments includes venture capital and buyouts, whereas the commodities category includes precious metals such as gold and silver, as well as oil and natural gas.
Other alternative investment categories include real estate, private debt, hedge funds, and structured products. See a list of alternative investments coupled with their suggested classification and relative risks and rewards here.
History
People have invested in alternatives throughout history: Commodities like precious metals have been traded since roughly 4500 BCE, while real estate and art have held value as investments since ancient times.
The “tulip mania” of the 1630s is one particularly interesting early alternative investment scandal. During a period of relative wealth for the Dutch after they gained their independence from Spain, some started collecting rare flower bulbs that created speckled and striped tulips.
Soon, tulip trading became its own market—historians have found multiple examples of companies created to trade tulips as this early alternative asset’s value grew. The tulip market spiked between December 1636 and February 1637, with some of the most prized bulbs going for as much as a nice house at the time. The speculative market ultimately crashed when the bulbs could not be sold for increasingly high prices, and some buyers who promised to pay top dollar for a tulip didn’t come through.
Early alternative investments in the US (outside of real estate, art, and precious metals, which Americans have invested in as alternatives to stocks and bonds since the 1800s) included the Transcontinental Railroad in 1852 (which was financed using private capital), the first venture capital funds in 1946, and more.
Future
Alternative investments have become more popular since traditional markets crashed during the 2008 financial crisis. When people saw the value of the traditional investments they relied upon plummet, many began to look into alternatives.
The alternative investments industry grew from roughly $3T in total global assets under management in 2008 to about $10.8T in 2019 as diversification became more appealing and more accessible to retail investors.
As of 2024, the alternative investments industry was expected to grow to more than $24T in assets in 2028—up from roughly $15T in 2022.
