an asset like real estate to represent an alternative asset

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Unlock new opportunities by learning what alternative assets are and the diverse types available for investment.

Invest in Alternative Assets: What It Is & Types

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

Alternative investments represent assets outside the typical realm of stocks, bonds, and cash. This broad category includes diverse options such as real estate, tangible commodities, private equity investments in non-public companies, and hedge funds employing varied strategies.

What are Alternative Assets?

Alternative assets are, simply put, any investment that falls outside the widely recognized categories of publicly traded stocks, conventional bonds, and liquid cash. This umbrella term encompasses a vast and diverse universe of assets, each with its own structure, liquidity, risk profile, and return potential.

Historically, alternative assets were primarily the domain of large institutional investors, such as pension funds, endowments, and sovereign wealth funds, due to their complexity, illiquidity, and high entry barriers.

However, with the evolution of financial products and platforms, some alternative investment opportunities have become more accessible to accredited individual investors, and even indirectly to the broader public through certain funds.

Popular examples of alternative assets include:

Real Estate (direct property, REITs, crowdfunding)
Precious Metals (gold, silver, platinum, palladium)
Commodities (oil, natural gas, agricultural products)
Private Equity (venture capital, leveraged buyouts)
Hedge Funds (diverse strategies)
Collectibles (art, fine wine, classic cars, rare stamps)
Infrastructure (toll roads, bridges, utilities)
Private Debt (direct lending, peer-to-peer lending)
Timberland and Farmland

Why Diversify with Alternatives?

The primary and most compelling reason to invest in alternative assets is diversification. Modern Portfolio Theory (MPT) suggests that combining different asset classes can help reduce overall portfolio risk for a given level of expected return, or increase expected return for a given level of risk. Alternative assets play a unique role in this by offering characteristics often distinct from traditional holdings:

Low Correlation to Traditional Markets: Many alternative assets tend to have a low or even negative correlation with stocks and bonds. This means their prices may move independently, or even in the opposite direction, when traditional markets experience downturns. When your stocks are struggling, well-chosen alternative investments might act as a buffer, helping to mitigate losses and preserve capital.
Reduced Portfolio Volatility: By adding assets that don't swing in perfect sync with your main portfolio components, you can potentially smooth out the overall ups and downs of your portfolio's value, leading to a less volatile investment journey.
Potential for Enhanced Returns: While diversification is the main driver, some alternative assets offer the potential for higher returns than traditional investments, particularly in specific market conditions. This often comes with higher risk and illiquidity, but the potential is there for those willing to invest in alternative assets.
Inflation Hedging: Certain alternatives, like commodities and real estate, have historically demonstrated an ability to perform well during inflationary periods, helping to protect your purchasing power when the cost of living rises.

Key Types of Alternative Assets

The world of alternative assets is vast, offering diverse opportunities to invest in alternative assets. Let's delve deeper into some of the most prominent categories:

1. Real Estate: Tangible Assets and Income Potential

Real estate involves owning, managing, or investing in physical land and buildings.

Real Estate Investment Types: This includes direct property ownership (residential homes, commercial properties, or land), Real Estate Investment Trusts (REITs), real estate crowdfunding platforms, and private real estate funds.
Advantages of Real Estate: It is a tangible asset with income potential from rentals, capital appreciation, potential as an inflation hedge, and the ability to use leverage.
Disadvantages of Real Estate: It suffers from illiquidity, often requires a high entry barrier in terms of capital, can be management-intensive, and is sensitive to market conditions and economic cycles.

2. Precious Metals: The Timeless Store of Value

Among the most popular alternative assets, gold and silver have served as stores of value for millennia. Investors choose to invest in alternative assets like these for various reasons beyond traditional market performance.

Types of Precious Metals Investment: These include physical bullion (coins or bars), Precious Metals IRAs (allowing specific physical metals in a tax-advantaged retirement account), mining stocks, Exchange-Traded Funds (ETFs) tracking metal prices, and futures contracts for sophisticated investors.
Advantages of Precious Metals: They are considered a safe haven asset, an inflation hedge, a portfolio diversifier, a tangible asset, and offer high liquidity.
Disadvantages of Precious Metals: They do not generate income (no interest or dividends), incur storage costs for physical holdings, and can experience price volatility.

3. Commodities: Raw Materials and Inflation Play

Commodities are basic raw materials used in commerce. They are often viewed as an inflation hedge and a way to invest in alternative assets tied to global economic growth.

Types of Commodities Investment: Common methods include high-risk futures contracts, specialized Commodity ETFs/ETNs, or investing in stocks of companies involved in producing or processing commodities.
Advantages of Commodities: They offer potential as an inflation hedge and diversification benefits due to low correlation with traditional assets.
Disadvantages of Commodities: They are known for high price volatility due to supply, demand, and geopolitical events. Holding physical commodities is impractical, and futures markets can be complex.

4. Private Equity: Investing in Non-Public Companies

Private equity involves direct investment into private companies or engaging in buyouts of public companies to delist them. This allows investors to invest in alternative assets not available to the general public.

Types of Private Equity Investment: This includes Venture Capital (investing in startups), Growth Equity (investing in rapidly growing companies), and Leveraged Buyouts (acquiring established companies, often with debt).
Advantages of Private Equity: It offers high return potential, access to unique opportunities, and often involves active operational improvement by the investment firm.
Disadvantages of Private Equity: It is very illiquid (investments locked up for many years), requires a high entry barrier in terms of capital, has less transparency, and inherently carries high risk.

5. Hedge Funds: Diverse Strategies for Absolute Returns

Hedge funds are alternative investment vehicles that pool funds and employ various strategies to earn active returns, often aiming for "absolute returns" regardless of market direction.

Types of Hedge Fund Strategies: Common strategies include Long/Short Equity, Global Macro, Event-Driven, and Relative Value.
Advantages of Hedge Funds: They can provide diversification through strategies uncorrelated with traditional markets, aim for absolute returns in various market conditions, and offer access to sophisticated investment techniques.
Disadvantages of Hedge Funds: They typically charge high fees (e.g., a "2 and 20" structure), often lack transparency, can be illiquid, and usually have high entry barriers for accredited and institutional investors.

6. Collectibles: Passion Meets Potential Investment

Investing in collectibles means acquiring rare or unique items with the expectation that their value will appreciate. This is often a passion-driven way to invest in alternative assets.

Types of Collectibles: Examples include fine art, classic cars, rare coins, stamps, fine wine, historical artifacts, high-end watches, and certain types of digital collectibles (NFTs).
Advantages of Collectibles: They are tangible assets, generally uncorrelated with financial markets, offer personal enjoyment, and can act as an inflation hedge.
Disadvantages of Collectibles: They are typically illiquid, require high expertise for valuation, incur storage and insurance costs, and their value can be highly subjective without generating income.

7. Infrastructure: Essential Services and Stable Returns

Infrastructure investments involve essential physical assets and services that support societies and economies.

Types of Infrastructure Investment: This includes direct investment through private equity or debt funds that acquire infrastructure assets, and publicly traded infrastructure funds/ETFs that invest in listed infrastructure companies.
Advantages of Infrastructure: It often generates stable cash flow, provides inflation linkage (revenues are often inflation-indexed), offers low volatility due to essential services, and contributes to diversification through low correlation.
Disadvantages of Infrastructure: It requires high capital outlay, involves a long investment horizon, and is subject to regulatory and geopolitical risks.

8. Private Debt: Direct Lending Opportunities

Private debt involves direct lending to companies (or sometimes individuals) by non-bank lenders. It's a way for investors to invest in alternative assets that provide fixed income returns outside traditional bond markets.

Types of Private Debt: This includes corporate direct lending, mezzanine debt, venture debt, distressed debt, and real estate debt (mortgages).
Advantages of Private Debt: It often offers higher yields than traditional bonds, provides diversification through lower correlation with public debt markets, allows for customized loan terms, and is often secured by collateral.
Disadvantages of Private Debt: It is generally illiquid, carries credit risk (borrower default), requires complex due diligence, and usually has high entry barriers for accredited investors.

Updated June 16th, 2025

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The Risks and Rewards of Alternative Assets

While the allure of diversification and unique return streams makes it attractive to invest in alternative assets, it's critical to understand the inherent challenges and opportunities.

Understanding the Risks

Investing in alternative assets comes with various risks:

Illiquidity Risk: Many cannot be quickly converted into cash without significant loss of value.
Valuation Challenges: Pricing can be complex and subjective due to lack of public trading.
High Entry Barriers and Fees: Often require high minimum investments and come with higher management fees.
Complexity and Lack of Transparency: Less regulatory oversight and public disclosure compared to public markets.
Regulatory Risk: Volatile regulatory environments can impact value.
Custody and Storage Risks: For tangible assets, secure storage, insurance, and proper handling are critical.

Understanding the Rewards

Despite the risks, the rewards of investing in alternative assets are compelling:

True Diversification: The primary benefit, helping to reduce overall portfolio volatility and risk.
Inflation Protection: Certain assets (commodities, real estate, precious metals) act as effective hedges against inflation.
Enhanced Returns Potential: Due to illiquidity premiums or specialized strategies, some alternatives can offer higher returns than public markets.
Access to Unique Opportunities: Exposure to specific growth sectors, private innovation, or uncorrelated assets not found in traditional portfolios.

Tax Implications for Alternative Assets

Understanding the tax treatment of alternative assets is crucial for maximizing returns and avoiding unexpected liabilities. The tax implications can vary significantly depending on the type of asset, how it's held, and your individual tax situation.

Capital Gains: When you sell an alternative asset for a profit, it's generally subject to capital gains tax. This can be either short-term (for assets held one year or less, often taxed at ordinary income rates) or long-term (for assets held over one year, typically taxed at lower, preferential rates).
Income Tax: Some alternative assets generate income that may be subject to ordinary income tax. Examples include rental income from real estate properties or interest payments from private debt investments.
Tax-Advantaged Accounts: Investing in alternative assets within tax-advantaged accounts like a Self-Directed IRA (including a Gold IRA) or 401(k) can offer significant tax benefits, such as tax-deferred growth or tax-free withdrawals in retirement. However, strict IRS rules apply to which alternative assets can be held and how they must be managed (e.g., specific rules for physical precious metals storage).
Unrelated Business Taxable Income (UBTI): If a tax-advantaged retirement account invests in certain types of alternative assets that generate active business income (e.g., through certain limited partnerships or debt instruments), that income could be subject to UBTI, requiring a separate tax filing and potentially negating some tax benefits.
Depreciation and Deductions: Real estate investors, for example, may be able to deduct expenses like property taxes, mortgage interest, and depreciation, which can reduce their taxable income.
Sales Tax/VAT: For physical assets like precious metals or collectibles, sales tax or Value Added Tax (VAT) may apply at the time of purchase, depending on your location.
Complexity and Professional Advice: Due to the varied and often complex tax rules associated with different alternative assets, it is highly recommended to consult with a qualified tax advisor or financial planner experienced in alternative investments to understand your specific obligations and optimize your tax strategy.

Regulation of Alternative Assets

The regulatory landscape for alternative assets is often less standardized and more complex than for traditional public markets. Understanding the oversight (or lack thereof) is vital before you invest in alternative assets.

Varied Oversight: Regulation largely depends on the specific asset class and how it is offered. Publicly traded alternatives (like REITs or commodity ETFs) are regulated by bodies like the Securities and Exchange Commission (SEC) in the U.S. and similar authorities globally. However, private alternative investments typically have less stringent oversight.
Accredited Investor Status: Many private alternative investments (such as private equity funds, hedge funds, and some private real estate offerings) are only available to "accredited investors." In the U.S., an accredited investor must meet specific income or net worth thresholds (e.g., annual income over $200,000 for the past two years, or a net worth over $1 million excluding primary residence). This restriction is in place to protect less experienced or less financially robust investors from highly complex and illiquid opportunities.
IRS Regulations for Retirement Accounts: The Internal Revenue Service (IRS) imposes strict rules on what types of precious metals can be held in a Self-Directed IRA and how they must be stored (e.g., in an approved depository). Custodians and depositories involved in Gold IRAs are also regulated.
Commodity Futures Trading Commission (CFTC): For investments in commodity futures, the CFTC is the primary regulator in the U.S., overseeing futures and options markets.
State-Level Regulations: Some alternative investments, particularly in real estate crowdfunding or private lending, may also be subject to state-specific securities laws.
Lack of Liquidity Regulation: The illiquidity of many alternative assets is inherent and not typically regulated away, making it crucial for investors to understand and accept this characteristic.
Due Diligence is Paramount: Because of the less stringent regulation compared to public markets, investors in private alternative assets must perform extensive due diligence on the investment vehicle, its managers, and the underlying assets.

How to Invest in Alternative Assets

While some alternative assets have high barriers, there are several pathways for investors to gain exposure:

Direct Ownership: Includes physically buying gold/silver, purchasing real estate, or acquiring collectibles.
Publicly Traded Options: Offer greater liquidity via REITs, Commodity ETFs/ETNs, mining stocks, or publicly listed infrastructure companies.
Private Funds (for Accredited Investors): Access to private equity, hedge funds, and private real estate funds.
Crowdfunding Platforms: Allow multiple investors to pool smaller amounts of capital for deals like real estate or private debt.

Integrating Alternative Assets into Your Portfolio

Deciding to invest in alternative assets is a strategic decision that should be carefully integrated into your overall financial plan.

Assess Your Goals and Risk Tolerance: Understand why you want to invest in alternatives and your comfort level with illiquidity and volatility.
Determine Allocation: Most advisors suggest a relatively small allocation (e.g., 5-20%) for individual investors, increasing with understanding.
Consider Your Investment Horizon: Due to illiquidity, alternatives are generally best suited for long-term investors.
Research and Due Diligence: Thoroughly investigate any specific alternative asset or fund, understanding its mechanics, risks, and fees.
Seek Professional Guidance: Given the complexities, seeking advice from a qualified financial advisor specializing in alternative investments can be invaluable.

FAQs about Investing in Alternative Assets

Here are some common questions prospective investors have when considering how to invest in alternative assets:

Are alternative assets suitable for everyone? No, alternative assets are generally not suitable for every investor. Due to their higher complexity, illiquidity, and often higher risk, they are typically better suited for sophisticated investors with a long-term investment horizon, a higher risk tolerance, and often, higher net worth or accredited investor status.
What is the typical minimum investment for alternative assets? Minimum investments vary widely. Some crowdfunding platforms or publicly traded alternative ETFs might have low minimums (e.g., a few hundred dollars). However, private equity funds, hedge funds, and direct real estate investments can require hundreds of thousands or even millions of dollars.
Can I put alternative assets in my IRA or 401(k)? Yes, certain alternative assets can be held in Self-Directed IRAs or 401(k)s, but strict IRS rules apply. For example, only specific types of physical precious metals are allowed in Gold IRAs, and they must be stored in approved depositories. Direct ownership of real estate or private companies within an IRA can be complex and may trigger UBTI.
Are alternative assets always high risk? Not always, but generally higher than traditional diversified portfolios of stocks and bonds. Their risk profiles vary significantly. Some (like venture capital) are very high risk, while others (like core infrastructure) may offer more stable, albeit lower, returns. The key is understanding the specific risks of each asset.
How do I find a financial advisor for alternative investments? Look for financial advisors who specialize in or have significant experience with alternative assets. Seek advisors with certifications like the Chartered Alternative Investment Analyst (CAIA) designation, or those affiliated with firms known for alternative investment offerings. Always verify their credentials and check references.
Do alternative assets improve portfolio performance in all market conditions? While alternative assets are sought for diversification and can perform well in specific market conditions (e.g., inflation, volatility), no investment performs well in all conditions. Their performance is tied to their unique drivers, and thorough research is always essential.
What's an accredited investor? An accredited investor is an individual or entity that meets specific income or net worth thresholds (set by financial regulators like the SEC) that qualify them to invest in certain complex or private securities. This status acknowledges their assumed ability to understand and bear the greater risks associated with these investments.

Key Takeaways

In an investment landscape that is constantly evolving, the ability to invest in alternative assets offers powerful tools for diversification, inflation protection, and potentially enhanced returns. From the enduring stability of precious metals like gold and silver, to the growth potential of private equity, and the income streams from real estate, alternatives provide a unique dimension to portfolio construction.

By understanding the types of alternative assets, their distinct risks and rewards, and how to access them, you can make informed decisions to strengthen your financial future. Remember that thorough research and professional guidance are your best allies as you explore these compelling opportunities.

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By Jordan McCaleb, Precious Metals Investment Researcher