Alternative Investments & Assets

Real estate can be classified as an alternative investment.

While most people are well-versed in traditional investments such as stocks and bank deposits, alternative investment options continue to be the privilege of the rich in the mind of the average investor. Even though it is true that investors in alternative assets are mostly institutions and well-off individuals, you can still diversify your portfolio with alternative investments if you are able to put upfront as little as several thousand dollars.

Hedge Funds

Hedge funds are among the most talked-about and vilified alternative investments on offer in the 21st century. They do not shy away from any legal opportunity to make money, including "shorting" stocks, a practice that made these institutions particularly unpopular among many people during the financial crisis of 2008-2009. Typically, the minimum hedge fund investment ranges from $500,000 to $1 million, though "star" funds may demand a significantly larger financial commitment. However, there is also a way retail investors can enter the industry --- you can buy into mutual funds that mimic hedge fund investment decisions with as little as $25,000. Such mutual funds include the DB Hedge Strategies fund, Rydex fund, Legg Mason Opportunity fund and the Boston Partners Long/Short fund.

Private Equity

The idea behind private equity is simple --- a private company should be more efficient than a public one because it does not have to meet quarterly and annual profit goals and can focus instead on maximizing shareholder value in the long run. Private equity funds invest in leveraged buyouts, or LBOs, essentially buying out stock exchange-listed companies with a lot of borrowed money, turning them private and squeezing out efficiency gains by, for example, downsizing operations and cutting capacity. The largest private equity firms include Blackstone Group, Thomas H. Lee Partners and Texas Pacific Group. You must be ready to park at least $250,000 to be able to invest in a private equity fund.

Real Estate

Investors had been putting money in bricks and mortar centuries before even common stocks became available, let alone such products of financial wizardry as hedge funds or private equity funds. Because of mortgages, it is possible to invest in this asset class even lacking the full amount of money you need to pay for a house. Furthermore, even if you do not have the cash needed for a down payment, you can buy into the real estate sector with the help of REITs, or Real Estate Investment Trusts. You can purchase REITs through a brokerage, like you would buy common shares or mutual funds. You can invest in a REIT with as little as $500 --- the money needed to open an account with a stock broker.

Precious Metals

Precious metals like gold and silver offer another alternative investment option. Typically, precious metals go up in price at times of high inflation expectations or economic turmoil. When the economy recovers or inflation expectations moderate, the rally in precious metals loses steam and their prices may even plummet. You can invest in precious metals directly by buying gold bullions, or certificates representing your ownership of gold bullions, from a bank. Alternatively, you can invest in gold or silver by buying specialized mutual funds or purchasing stocks of companies that mine these metals.

Art

Art is not only beautiful, but it can also be a reliable store of value. Particularly valuable are items painted, carved, photographed or otherwise produced by well-known artists. With time, expensive art objects become even more costly while fairly inexpensive ones do not greatly rise in value. Accordingly, it makes more sense to buy one small painting of Picasso than to become the owner of 100 paintings produced by little-known artists. Still, you can go for the 100 no-names option if you are prepared to bet that one of those unknowns will one day become another Van Gogh --- unappreciated when he was painting his masterpieces and a renowned genius after death.

References

• "The Wall Street Journal"; Alternative Answers; Gregory Zuckerman; June 2008
• "The Economist"; Plenty of Alternatives; February 2008
• "The Wall Street Journal"; Smart Money Takes a Dive on Alternative Assets; Jason Zweig; January 2009
• "Forbes"; Hedge Fund Investing 101; Lynn Sherman; July 2000
• CNN Money: Funds to Spice Up Your Portfolio
• Bloomberg Businessweek: Private Equity: Not Just For The Big Guys

Resources

• Seeking Alpha: 7 Cheap REIT Stocks With Repeated Insider Buying