March 30, 2021
17+ Alternative Investments You Might Want To Know In 2023
Alternative investments have become an essential component of investment portfolios today. In fact, by 2025 total global alternative investments under management are projected to reach $17.2 trillion, a 4x increase since 2010.
Even more, according to the Chartered Alternative Investment Analyst Association (CAIA Association), alternative investments could produce at least half of market revenues in the coming years, even though they represent a small portion of the market.
So, what’s leading to this growth of alternative investment strategies and what are some common alternatives available today? Let’s dive into it.
Why Alternative Investments?
While the usual trifecta of stocks, bonds, and mutual funds may offer a certain amount of diversification, holding investment dollars outside of the market can help buoy your portfolio if public markets take a turn.
Alternative assets, in specific, have been growing in popularity as a portfolio diversifier, especially during market downturns. Ranging from precious metals, to real estate, to commodities and more, alternative assets are typically uncorrelated with traditional assets and thus can deliver a differentiated source of returns. These investments don’t tend to fluctuate in the same way that the stock market does and often play a critical role in minimizing losses during market downturns.
Even more, alternative investment portfolios have delivered annual returns close to 9%. Some alternative investments can even offer a higher rate of return than traditional investments: farmland, as an example, has outperformed both stocks and bonds over the past 30 years, generating an average annual return of 10.71% from 1992-2022, compared to US stocks’ average annual return of 9.58% and US bonds’ average annual return of 4.64% during this same time period.
Last but certainly not least, several alternative investments can be a stable source of passive, recurring income, as well as a superior hedge against inflation. Real assets, such as gold, oil, real estate and farmland, have historically been some of the best hedges as they tend to maintain or increase in value due to their intrinsic value and limited supply. This means that while other assets reduce in value (stocks, bonds, etc), land prices tend to increase, as do their yields.
Alternative Investments You May Want Know This Year
How do you know which alternative asset to choose? Should you consider investing in fine wine or NFTs? Peer-to-peer lending or rental properties? Farmland or REITs?
Here are some alternative investment options you may want to consider this year.
1. Real Estate
Real estate is one of the most well-known alternative assets.
However, not all real estate investments are created equal. Some can be largely speculative, while others might be as straightforward as owning your own home.
Some of the most common real estate opportunities include investing in commercial real estate, buying a rental property, purchasing shares in a real estate investment trust (REIT), or buying farmland.
Some real estate opportunities have offered historically stable returns: rental properties, for example, have historically appreciated while offering passive income, and REITs offer fractional ownership of one or more properties for added diversification. Farmland investing—be it through the outright ownership of a farm or a farmland investment manager like FarmTogether—has also been a historically steady performer in the world of alternatives.
Let’s break down each of these real estate opportunities in greater detail next.
Farmland investing can offer a unique value proposition that other types of real estate investments cannot. While farmland investments have historically provided many of the same perks as traditional real estate, farmland has delivered higher average annual total returns over the last 30 years – and with much less volatility.
For example, 2022 saw high prices for the average acre of U.S. cropland. In 2010, the average acre was $2,700. Now, that figure averages $5,050 per acre. FarmTogether’s slate of farmland investing opportunities has a target hold date of 10-12 years, meaning that investors could observe decade-long trends to see where farmland values might go in the future.
Farmland’s historically positive growth is far from the only reason why farmland investments might deserve a top mention for alternative asset diversification. Historically, farmland returns have been uncorrelated with stocks, bonds, and broader market indices, which can help reduce portfolio risk if markets take a turn.
Additionally, when you invest in farmland, you gain an asset that has a historically positive correlation with inflation. As inflation eats away at the value of the dollar, and therefore the value of many traditional assets, the price of agricultural products has typically risen. By investing through FarmTogether, investors can benefit from higher crop prices, since you’re entitled to a share of the profits made at harvest. Additionally, farmland is only likely to become more valuable as the cost of the goods grown and produced on the land increases.
Historically steady value appreciation, low volatility, and a positive relationship with inflation all make farmland investing an increasingly compelling option for those looking to help broaden their assets.
3. Rental Properties
Over the last twenty years, investments into single-family rental properties drove an average annual return of 11.7%, outperforming the S&P 500’s 9.43% average annual return over the same time period.
Rental properties can provide:
- Passive income through rental payments.
- Increased equity value due to the appreciation of the property value over time.
- A potential hedge against rising prices, since investors can match rent with shifting market conditions.
While rental properties might seem like an easy choice when investing, they typically require an array of skills from basic maintenance knowledge to tenant laws specific to your region. When becoming a landlord, individuals could consider budgeting for property improvements, periods when the rental is empty, and insurance; These expenses can impact your recurring rental income when you invest directly in a rental property, as well as impact how quickly you make passive income through this alternative investment.
4. Commercial Real Estate
Commercial real estate is the 5th largest industry in America, with an economic impact of approximately $16 trillion.
Commercial real estate often requires a higher initial investment. However, one doesn’t have to necessarily purchase a commercial property on their own. Rather, investors can take advantage of this investment via a variety of more accessible options:
- Real Estate Investment trusts, or REITs, which allow investors to purchase shares in a CRE. This is the most economical option, as a single share is often under $250.
- Real Estate Investment Groups, or REIGs, bring together private investors for the purpose of purchasing real estate. The cost to join depends on the group, but the minimum investment ranges from $5K to $50k.
- Equity firms allow accredited investors to purchase shares in their offerings. The minimum investments for these platforms range from $25k to $100k.
Historically, the average ROI for CRE has been between 6% and 12% annually, provided by both rental income and appreciation.
REITs or Real Estate Investment Trusts are companies that invest in several income-generating real estate opportunities. Investors can then buy shares of a REIT and, by virtue of the REIT owning real estate, own shares in those properties as well.
REITs provide investors with a way to obtain fractional ownership of real estate as opposed to purchasing a specific property on their own. Similar to investing in real estate through a crowdfunding platform, REITs make it easier to incorporate real estate holdings without much of the legwork, research, and costs associated with direct property ownership.
REIT categories are based on what kind of investments they include. They typically include mortgage REITs, exchange-traded REITs (which can be bought or sold on a stock exchange), non-listed REITs (not available for public trading), and sector-focused REITs (commercial, medical, or personal real estate, for example).
REITs are considered a long-term investment, with research showing they have outperformed the stock market on 20 to 50-year horizons. However, publicly listed REITS also come with the volatility associated with the stock market; over the last three decades, REITs have had a standard deviation of 19.32%.
And, REITs can come with significantly higher tax implications because the trust must pay property taxes on the real estate they own. These expenses come out of the returns you’d get as a shareholder. Plus, since REIT income is considered “ordinary income” rather than investment dividends, you might also pay more taxes on your own earnings.
The Bitcoin market is, according to some experts, a speculative one. Recent estimates forecast that a $10,000 investment in Bitcoin at $100 a pop could be worth $5 million long term. However, Bitcoin and Ethereum were both down more than 65% by the end of 2022, with the entire cryptocurrency industry losing almost $2 million over the year.
Despite the volatility of cryptocurrency, it hasn’t deterred investors from seeing its value within their portfolios thanks to its historical return. For example, even though Bitcoin was down 58% in 2014 and 73% in 2018, it still delivered 230% annualized returns between 2011 and 2021.
Bitcoin and other cryptocurrencies represent a major disruption in the way we perceive value, and how decentralized entities can function in ways once left to central reserves. But that doesn’t mean they’re always the right alternative investment, particularly for those investors with a shorter investment horizon or those nearing retirement.
7. Private equity
When you have a sizable amount of money ready to invest–but don’t want to go through the process of hand-selecting stocks, funds, bonds, or investments outside the stock market–you might consider putting some of this work into a professional. For many ultra-high-net-worth investors, private equity or hedge funds can be a great option.
Private equity funds manage a portfolio of investments that range from property to privately held companies, which use investor money to find maximum returns beyond what conventional Wall Street investments might provide.
Private equity has historically surpassed typical return rates of many other managed investments, at just under a 10.5 % annual return for the past two decades. This can be a worthwhile opportunity for high-net-worth individuals that can afford to put at least $250,000 on average into a fund. Just be ready to pay the required fees. Most firms charge a 2% management fee based on assets, as well as an average of 20% of profits made.
Investing in a private equity firm is also typically inherently risky: you don’t have the same oversight and regulation with this option as you would with an index fund or direct stock ownership. But, you’re unlikely to generate as much passive income with either of those options as you would through private equity.
8. Hedge funds
Hedge funds develop strategies to gain maximum returns on short-term holdings by making money based on the rise and fall of a particular asset’s value.
For example, a hedge fund might hold a large portion of stock purchase options in anticipation of that stock dropping in value. If the stock hits that price (or lower), the hedge fund will turn a profit from the price difference on the shares it borrowed and then re-sold to the original owner.
Hedge funds are typically considered a high-risk investment since there’s often a high possibility your investment could lose value. Hedge fund performance has declined steadily in the past decade and has been historically underperforming the stock market. From 2010 to 2020, the S&P 500 returns beat average hedge fund returns every year. On average, that decade offered an average annual return of 14.4% from the S&P 500 and an average annual return of 5% from hedge funds.
Investors aiming to invest in hedge funds can expect a minimum initial investment of $100k and up. There are also management fees of 1-2% of the value of your investment.
9. Gold & Other Minerals
Gold is often considered a stable place to “park” investment cash during turbulent times in the stock market. This commodity, as well as other precious metals, can give investors a place to store their money when conventional investment performance is varied.
You can also trade futures (buying or selling when gold or other minerals hit a certain price) as well as options (buying contracts to buy or sell at a predetermined price within a certain timeframe). The latter two options are more complex but have the potential to offer bigger returns in a shorter period of time. However, these options are typically far more volatile and often come with a much greater degree of risk.
Historically, gold investors have not only protected their assets in a stable commodity but they’ve also seen their money grow. An ounce of gold in January 2016 cost approximately $1,237. Today, that same ounce of gold is valued at almost $2,000. While these returns have been comparatively lower than other alternative assets like farmland, the general trend has been upward in nature.
However, though investing in gold can offer a perception of stability, the volatility of this “safe-haven asset” reached 14.52% between 1992 and 2022. In comparison, alternative safe-haven assets experienced much lower volatility, with farmland at 6.64% and bonds at 5.6%.
People often claim that gold is one of the most stable places to invest over time since it has been historically less affected by turbulent markets. As we mentioned above, gold and other precious metals can certainly be a wise place to invest; due to the unpredictability of markets and trends, many investors may prefer this risk-averse investment.
However, gold is not the only commodity available: commodities are a fairly broad category of investments in real, tangible goods, such as beef, grains, oil, natural gas, and more.
Commodity prices are primarily affected by scarcity and demand: if coffee is in high demand and crop volume is low, the price of coffee in the commodities market rises. For example, in 2021, coffee prices rose 21.6% due to extreme weather damaging 20% of Brazil’s coffee plants. Likewise, driven by supply shortages caused by the Russia-Ukraine war, grain prices rose X% in 2022.
Other factors that drive price movement, supply, and demand include income and population growth, an area’s industrialization and urbanization, evolving technology, and policy changes.
Investing in commodities is fundamentally different from investing directly in the land or operation that produces them. Farmland investing, for example, provides the opportunity to hedge against short-term volatility in harvest conditions or commodity prices through fixed lease payments. Land can also be replanted or converted to more attractive crops as markets change over the long-term.
What was once the realm of passionate fans has turned into an alternative asset class that is becoming a major force. Collectibles are a familiar phenomenon to just about anyone: be it for a mint-condition baseball card or the Notorious B.I.G.’s crown. Any tangible item that grows in value beyond its initial purchase price qualifies as a collectible.
The collectibles market can be accessible for investors at any level: for a smaller investment (some as low as $3), investors can own fractional shares of many high-value items.
Still, collectibles might not be for everyone: historical returns are far from steady and sales can be sporadic since the value of a collectible directly relates to the demand for the item and the available supply. For example, in-demand Beanie Babies could go for thousands of dollars one year to less than $5.
Even so, collectibles are one of the more interesting and unique ways to invest.
NFTs, or non-fungible tokens, are unique, digital representations of assets living on a blockchain. They differ from fungible tokens like cryptocurrencies, which are identical to each other so they can be exchanged or traded.
NFTs hold a value primarily set by the market and its demand for the product. The hype (or lack of) around an NFT can make it a highly volatile investment.
NFTs began with art and collectibles but have now spread into many different sectors that include:
While there are many opportunities to invest, not all NFTs yield positive returns. Currently, only 20% of NFTs show minimal-to-decent positive yields. There has also been a drop in both NFT value and trading volume, with market capitalization peaking at $35 billion in March of 2022 before declining 40% by the year’s end.
However, there are novel monetization opportunities in NFT marketplaces for alternative investing, such as through NFT lending platforms or NFT perpetuals.
13. Peer-to-peer Lending
Peer-to-peer lending is the act of receiving a loan directly from another individual without working with a bank or other financial institution. Individuals looking to take advantage of this alternative investment can work with peer-to-peer lending platforms.
These platforms connect the lenders (investors) with the borrowers. They then offer loans to individuals for a wide range of reasons, from small businesses that need capital to grow to patients looking to finance medical procedures, and more.
The P2P system used today originated in 2005 at a UK financial services company. By 2019, the industry had a value of $1.45 billion (though it declined to $818.5 million during the Covid-19 pandemic).
P2P lending can be risky if you put all of your investment dollars into one buyer, but the payoff can be higher than opening a traditional savings account or CD, with historical average returns of around 10% annually. Getting started is as simple as opening an account with a P2P lending site, and choosing where to direct your funds.
14. Private Business Investment
Private business investing involves an individual using their own wealth to purchase shares in a business that isn’t trading on the public market but needs capital. There are two main types of private business investment: private equity firms and angel investors.
Private equity firms are made up of groups of investors who loan millions to billions of dollars to businesses for a majority stake in that business. Investors can expect to pay a minimum of $1M to begin their journey with a private equity firm.
The businesses that participate in this kind of funding are not publicly traded and can be considered risky, but private equity has tended to provide higher returns than other managed investments. PE offered a 10.5 % annual return between 2010 and 2020 while the Russell 2000 Index averaged 6.69% per year and the S&P 500 returned 5.91%.
However, impacted by reduced fund sources, rising inflation, and the Ukrainian war, private equity saw lower deal volumes and smaller returns between 7% and 8.4% in 2022.
Angel investors, also called business angels, private investors, or seed investors, provide startup companies with financial backing in exchange for equity. Often, angel investors are familiar with the industry in which the business operates and can advise them as they grow to help ensure longevity and viability. Investment amounts can vary greatly, from $10,000 to many millions, depending on the company and its needs.
15. Art & Antiques
The general public may perceive art and antiques to be an outdated form of investment, but it’s still a common alternative investment with the potential to become an income-producing real asset. Art and antiques are a long-term investment strategy and, as with any investment, there are risks. While you can profit greatly from an art piece or antique, they can take more time to appreciate–if they do at all.
Contemporary art performance had a 13.8% appreciation over the last 25 years. Comparatively, the S&P 500 appreciated 5.5%, gold appreciated 3.2%, and U.S. corporate bonds appreciated .5% over the same period.
Art investors can purchase artwork themselves, or buy shares through an online platform. If you buy the art yourself, you will need to consider the storage and maintenance costs. Purchasing shares in an art piece means you won’t have to worry about storing the physical asset. The cost of your investment will vary depending on the piece.
Fine wines often have high demand with a very limited supply, two indicators of a productive alternative asset with long-term value potential. Over the last 15 years, wine has provided a 10.6% annual return. More impressively, wine investments remained stable during 2022, producing returns of nearly 11% during the first half of the year when almost every other asset suffered significant losses. These returns are comparable to farmland and real estate, which also ended the year positive.
However, like other physical assets, wines require proper storage and care, as well as insurance to protect both the wine and the storage facilities. It can also be challenging to liquidate this investment.
There are a few methods to try if you’d like to diversify your portfolio with fine wines:
- Buy wine at auctions, both online or physical
- Purchase wines at a Wine Exchange, like Cavex or the London International Vintners Exchange, which operates similarly to a stock exchange
- Invest in wine through a wine investment platform
- Purchase and store bottles yourself
Investing in wine can also require a high initial investment. To build a portfolio of wines, investors can expect to pay anywhere between $15k and $25k. You can also invest in U.S. vineyards, which removes the challenges of storing and caring for the wine yourself while providing the benefits of investing in farmland.
17. Equity Crowdfunding
Similar to private business investing, equity crowdfunding is the act of raising capital from multiple investors to fund a private business. In exchange, investors receive securities in the company that are proportional to their investment.
Online equity crowdfunding platforms share that annual returns for this alternative asset range from 14.4% to 41%, while public markets offer an annual return of 10.2%. However, equity crowdfunding can be risky: there’s no guarantee the private business will be successful (or when) and there can be a higher chance of fraud and cyber security issues.
Investors can use online platforms to purchase shares in a business for as little as $50. After purchase, investors can expect to hold on to those shares for a long time. Shares aren’t bought and sold like on the stock market. Often, shareholders won’t see a return until the company lists on a stock exchange, or another business purchases the company in which you hold stock.
Prefer to invest in farmland crowdfunding? Learn more here.
Choosing the Right Alternative Investment for You
No matter what you’re looking for in your next investment, the world of alternatives can provide a unique value proposition. That might mean venturing into real estate, taking a rollercoaster ride with cryptocurrency, or going with a historically strong and stable performer like farmland investing.
In the event of the latter, investing in farmland with FarmTogether can give you exposure to new investment types, historically market-beating performance, and a historically recession-proof way to build your portfolio.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.
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