Even before the 2008 global financial crash, investors have been seeking to mitigate their level of risk through means like portfolio diversification, including alternative investments that go beyond traditional investment vehicles like stocks and bonds. And with experts ringing alarms that a recession may be imminent, there’s no time like the present to consider alternative investing.
What are some of the common alternative investments, though? We’ll take a look at a few, examine the trends to see which alternative investment types are growing the most rapidly—and explore why.
Are Alternative Investments on the Rise?
Yes! We can look at the alternative investments market size to better understand this shift. The data shows that modern investors are becoming increasingly open to—even enthusiastic about—alternative investments. For example, a Preqin report cited by Bloomberg predicts “the industry’s global assets under management to rise to $18.3 trillion by the end of 2027 from $9.3 trillion in 2021.”
While projecting the value of the global alternative market to double might sound like wishful thinking, its overall value has steadily increased, on a year-to-year basis, since at least 2010.
What Are the Main Reasons Why Alternative Investments Are Growing in Popularity?
Alternative investments are growing in popularity thanks to the unique advantages they offer, which include the potential for passive income generation as well as seeking insulation against market volatility. Alternative investments may help investors to develop portfolios that are diverse, flexible, and recession-resistant.
What Are the 5 Categories of Alternative Investments?
Especially when compared with traditional asset classes, alternative investments can be a little more difficult to categorize—but the CFA Institute outlines 5 main categories:
- Hedge Funds
- Private Capital
- Natural Resources
- Real Estate
- Infrastructure
What Are the Fastest-Growing Alternative Investments for 2023 and Beyond?
According to an in-depth report by Preqin, The Future of Alternatives in 2027 is bright, with today’s fastest-growing alternative investments including venture capital, infrastructure, and private debt.
- Venture Capital | While it’s expected “to face significant headwinds” thanks to “a very challenging macroeconomic environment,” the long-term outlook for venture capital as an investment is positive. What does it mean to pursue venture capital as an alternative investment? It means becoming a venture capitalist (VC): “a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake.” This can mean funding a start-up or helping smaller companies fund their expansion. When those companies they’ve helped to fund succeed, the financial rewards can be impressive.
- Infrastructure | Investing in infrastructure means making an “investment in the facilities, services, and installations considered essential to the functioning and economic productivity of a society,” according to Preqin. By definition, infrastructure can be thought of as economic, social, or both. The former category includes aspects like natural resources, power and water utilities, and transportation, while the latter includes services related to government, education, and defense. Infrastructure investments are generally considered to be relatively stable, low-risk strategies suited for long-term goals.
- Private Debt | Especially since 2008’s major financial crisis, borrowers are turning away from traditional lenders like banks and instead look to private or direct lenders, like individual investors, for their funding needs. As Mercer notes, “Investors look to private debt for resilience, diversification and to pursue better returns.” By taking on the role of lender, a private debt investor can take a more hands-on approach to crafting the loan details, effectively “baking in” specific lender protections for increased security.
As always, it’s important to consult your financial advisor for advice whenever you are considering any investment moves to assess whether such investments are suitable for you based on your investment goals, risk tolerance, and financial situation.
Honorable Mention: Life Settlements
While venture capital, infrastructure, and private debt are among the most well-known alternative assets examples, they don’t tell the whole story—far from it, in fact. In reality there are at least a handful of additional examples, one of which is life settlements.
From a consumer’s perspective, a life settlement enables someone to sell an unwanted or unneeded life insurance policy to an investor. In exchange, the policy’s seller, meanwhile, receives a cash sum they can use for any number of purposes, like taking a family vacation or paying off medical expenses.
Through this transaction, the investor becomes the policy’s new owner and the eventual beneficiary of the death benefit. In addition to the common advantages shared by many alternative investments, life settlements also enable investors to know roughly what the return on their investment will be, since it’s based on the policy’s stated death benefit. Of course, there are still variables at play that will cut into that payout—namely, the seller’s life expectancy and the policy’s remaining premiums.
Life settlement investments are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional who is well versed in this field to determine if life settlements are a viable option for you.
The Future of Alternative Investments Is Bright
Thanks in large part to the advantages they provide, alternative investments are expected to maintain their steady-seeming growth over the foreseeable future. And, as Forbes points out, the “aging U.S. population will likely expand the universe of potential insurance policies that could become life settlements,” presenting plenty of opportunities to invest. Reach out to i2 Advisors to learn more about life settlements today.
THIS MATERIAL IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. OTHER THAN LIFE SETTLEMENTS, I2 ADVISORS DOES NOT PROVIDE THE SERVICES DESCRIBED IN THESE EDUCATIONAL MATERIALS NOR DOES IT RECOMMEND ANYONE TO INVEST IN THE ASSETS DESCRIBED THEREIN. ALL INVESTMENTS CARRY RISK AND INDIVIDUALS SHOULD CONSULT WITH THEIR FINANCIAL PROFESSIONALS BEFORE UNDERTAKING ANY TYPE OF INVESTMENT. THIS INFORMATION DOES NOT CONSTITUTE INVESTMENT ADVICE AND SHOULD NOT BE CONSTRUED AS A SOLICITATION OR OFFERING OF ANY INVESTMENTS DESCRIBED THEREIN.