Not all alternative investments are easy to invest in

Alternative investments are also often less liquid than traditional investments; they carry unique risk, return, and tax considerations.

The specifics depend on the type of alternative asset, as well as how long you hold it for, and your income.

Because alternatives often have little correlation with traditional investments like stocks and bonds, adding them to a traditional portfolio can reduce its overall risk exposure.

Investors often use alternative investments, from collectibles to real estate, as a way to diversify their portfolios in case of market volatility. Getting started investing in these alternatives differs depending on the investment.

The financial assets typically fall outside the scope of traditional investments like stocks and bonds, and they’re often intended to diversify investor portfolios.

These categories include real estate, private equity, private debt, hedge funds, collectibles, and more.

Limiting PE to accredited investors helps protect less experienced investors from large and risky investments. Accredited investors must meet requirements set by the Securities and Exchange Commission—they're typically required to have a net worth exceeding $1M, for instance.

When the traditional markets crashed during the 2008 financial crisis, many people saw the value of their traditional investments plummet and began to look into alternatives as a result.

More specifically, 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.

This podcast episode starts with an explanation of what alternative investments are, then goes on to explain how people use them to diversify their financial portfolios and answer some common questions about alternative investments. Notably, the host interviews a certified financial planner about the topic.

The accreditation is meant to protect retail investors from potential losses. Financial professionals with Series 7, 65, or 82 licenses qualify, but so do individuals with over $1M in net worth.

In the US, many retail investors lack the SEC-mandated status (a high enough net worth, income, and other factors) to directly invest in hedge funds. The regulator considers hedge funds too risky for the masses. Hedge fund-like strategies have emerged as a workaround, despite potential pitfalls.

These different types of private equity include venture capital, growth equity, and buyouts.

From what’s known as the first leveraged buyout, when JPMorgan acquired the Carnegie Steel Company, to the creation of the first-ever hedge fund, alternative investments have a long history.

Like private equity fund managers, private credit managers typically raise funds directly from investors, lending to corporations. The borrowers can benefit from the lack of middlemen and resulting efficiency, and the lenders often yield comparatively higher returns.

Whether or not an annuity is the right investment option depends on the buyer’s unique needs. People who plan to retire soon are more likely to opt for the lower-risk investment, but there may be opportunity costs for people seeking higher returns.

The portion of pension funds' risky investments, including alternative investments such as private equity, increased from 14% in 2001 to 39% in 2021. Analysts say private equity investments have delivered higher returns than traditional assets like stocks and bonds. Increased investment in private equity has also given pensions a way to recover from the 2008 financial crisis without necessarily investing more money.

Angel investors leverage their high net worths to fund seed-stage startups. While they could see high returns, investing in such an early company is a risk.

Although the process of going public means the general public can invest in a company, the initial investment period is different. Before individual investors get in on the action, investment bankers sell the shares to larger financial institutions who can afford the asking price and risk associated with an IPO.

Private equity often attracts investors who can afford to tie up capital for long periods of time in exchange for higher returns than traditional investments. For many years, private equity at least tracked with the S&P 500 in terms of returns to investors, but in 2024 and 2025, it underperformed and posted declining returns.

Angel investor Alicia Syrett details the top reasons investors turn down entrepreneurs. For example, the entrepreneur didn’t do their homework by, for instance, not researching the investor.

Institutional investors, on the other hand, are investing for someone else. There are big differences between the two, one being that institutional investors can be granted certain special treatment (like being able to purchase IPOs right away).

Mutual funds function similarly to other types of investments. If you want to invest, you go through a brokerage firm. However, they have a few key differentiators. Most are actively managed by a broker instead of passively earning you returns. Plus, they can carry some hefty fees.

Trust funds can be expensive to set up, given that their establishment often requires paying a lawyer for their time. But for many, that expense might be worth it depending on the complexity of the assets and the ability to specify when, where or how an estate’s assets are used.

For example, as some US regulations have loosened in recent years, retail investors have begun to get exposure to the private credit market via ETFs that invest in publicly traded financial vehicles with private credit exposure, such as BDCs.

For retail investors, the stakes may seem higher and more personal. Critics say that this dynamic means that retail investors are more susceptible to behavioral biases that could lead them to make poor decisions when it comes to buying and selling assets. For instance, fear of missing out could cause a retail investor to buy a stock that is popular but not a financially worthy investment.

Almost half of adults in the US report owning no investable assets. For many, the barrier to entry is the belief that investing is too complex for them to get involved. Consulting with a financial psychologist, this article addresses the cognitive bias that causes so many people to miss out on financial opportunities, and offers tips on how to get past the anxieties and just begin.

Investors are likely familiar with “asset allocation,” creating an ideal mix of different asset types in an individual's portfolio. But asset location matters just as much for investors who are conscious of how much they owe in capital gains taxes.

Hedge funds typically use a "long-short" investment strategy—where funds diversify by investing in a mix of long positions and short positions—to balance risk and maximize profits. Including short positions gives hedge funds some protection against downturns in the market, although the strategy can have uncapped losses for investors.

While investors are attracted to the high rates, private credit is particularly attractive to mid-sized businesses that are too small for bank syndication and want faster, more flexible financing options.

An infographic that shows the most common types of investments used by financial advisors with their clients in 2023 also found that nine in 10 advisors used ETFs, and three-quarters invested in cash and cash equivalents.

Retail investors often trade 100 shares at a time, while institutional investors trade 10,000 or more. The biggest difference is that, unlike retail investors, institutional investors are professionals who are trading someone else’s money.

Barbell investment strategies emphasize bypassing medium-risk investments in favor of combinations of high-risk and low-risk investments. The idea is that the stability on the low-risk side offsets the volatility on the high-risk side, and would look like a barbell with two large weights on either end of the bar.

Private equity firms focus on buying and improving private companies with the intent to sell them for profit or take them public. Venture capital is technically a form of private equity in which investors focus on startups and generally don't seek majority control of the company. Hedge funds are pooled investments for sophisticated investors that pursue a wide range of often complex strategies.

Margin accounts are leveraged accounts through brokerage firms that allow investors to make trades without the full amount of capital on hand. Similar to a secured loan, margin accounts often require some form of collateral and typically have a cap on how much investors can borrow. However, trading with a margin account is much riskier than a traditional investment account. Fees and charged interest are due on margin accounts, regardless of trade performance, meaning it's possible for investors to lose more money than just their initial investment.

Hedge funds often operate on a "2 and 20" model: Investors pay fund managers a 2% management fee, and the hedge fund keeps 20% of their profits. (The 2% is imposed annually, irrespective of performance.) Hedge funds are known for chasing big returns—and taking big risks to get them. This explainer not only breaks down how they work in detail, but also the strategy first introduced in 1949 that still shapes hedge fund investing today.

The individuals who invest this initial capital are called the firm's limited partners. Private equity firm LPs include sovereign wealth funds, university endowments, high-net-worth individuals, and more.

One unexpected perk is that ETFs are typically associated with lower capital gains tax requirements. Read this list to learn more about the benefits of investing in ETFs.

Private firms that manage family fortunes have been investing more in alternatives like venture capital and real estate, impacting the wider financial world.

High fees tend to eat away at whatever edge professional managers accrue, resulting in most such funds performing worse than their underlying benchmark indexes like the S&P 500.

In order to ensure that retirees received all the retirement funds a company or other institution may have promised them, pensions were often limited to investing in run-of-the-mill assets like government securities, investment-grade bonds, and blue-chip stocks. But as market conditions have evolved, pensions are increasingly being invested in a wider range of assets, including alternative investments.

Think: changes in interest rates that impact the bond’s value, or a bond issuer completely defaulting on a loan. There are steps investors can take to lower their initial and future risk when investing in the bond market, such as checking a company's bond rating before investing.