Although there is no strict official interpretation of Alternative Investments, in the broad sense, they usually refer to investments that don’t fall within the traditional investment bounds of property, cash, stocks, or bonds. The phrase is loosely used and can refer to financial assets such as hedge funds, CFDs, private equity, venture capital, and managed futures as well as tangible assets such as stamps, coins, antiques, and wine.

Because these investments are generally more complicated and less liquid than traditional investment types, the vast majority of Alternative Investments have traditionally been managed by huge financial institutions and powerful millionaires. Today, however, there are Alternative Investments accounts with minimums of only $2,000 available to the general public. Although many accounts with low minimums turn out to be fraudulent schemes or scams, there are more and more legitimate low-minimum accounts every day. To guard yourself against investing in a fraudulent account, be sure to trade only with managers and brokers which are registered with their national regulatory bodies. In the US, this would be the NFA.

What Alternative Investments Look Like

Because of the abundant varieties of Alternative Investments, it’s important to understand that each specific type one will require a different approach to investing. What they all have in common, however, is that their approach will be different from the generally accepted approaches of traditional investments. The characteristics of these investments are also markedly different, both from each other and from traditional investments. They also pose a wide variety of risks, most of which are different from the generally accepted risks of traditional investments.

This high degree of low or non-correlation to traditional investments and to each other gives these investments a very valuable property. In small amounts, these investments can help to provide a great deal of diversification to the average portfolio. If you have Alternative Investments in your portfolio, they can continue to return profits for you even when all your traditional investments are losing value.

Most large financial institutions, millionaires, and pension funds assign only a small fraction of their portfolios to these investments. Although the novice investor can be tempted to invest a greater percentage of his portfolio than he should in Alternative Investments, the pros understand that only a small percentage is necessary to provide the proper amount of diversification. The majority of CTAs strongly recommend that your Alternative Investments percentage should only be about a tenth of the total worth of your portfolio. They warn that any more than about ten percent would skew your risk into unwanted territory.

Alternative Investments Categories

Because the term itself is so broad, there are new investment types that can be classified as alternative injected into the market every day. It is therefore practically impossible to neatly classify and categorize every single subtype of Alternative Investments available for trade. There are, however, three common financial Alternative Investments subtypes that can provide a light form of categorization for purposes of diversification analyses.

1. Hedge Funds

These are usually only available with extremely high minimum investments and so are usually only interesting to the ultra-wealthy. They are, however, known for their high rate of returns. Hedge funds are some of the most complicated investments that fall into the alternative category.

2. Managed Futures

The most common of Alternative Investments is the managed futures account. This type of account is traded by a professional CTA, on your behalf. The CTA attempts to generate returns from the rises and falls in price of a variety of futures markets. Although trading in managed futures can be done by automated systems, its best if these systems are overseen by experienced professionals who can “unplug” them at appropritate times. One of the more helpful aspects of automated systems is their ability to compute the appropriate number of contracts for a particular account size. This helps the manager to employ specific fine-tuned strategies without emotion in order to generate returns over a long-term period.

3. Private Equity

Private Equity investments are usually for the “patient investor.” This is due to the fact that the holding period is often years, during which the particular asset achieves value through growth, disposition or other means. For example, many Private equity investments bet money on private companies and usually only generate returns after long periods of nurturing, branding, client aquisition, and growth management.

Risks of Alternative Investments

Alternative Investments tend to combine a low degree of transparency and liquidity together with higher fees and more complicated strategies, giving them a unique set of risks and complications that should only be tackled by experienced investors or managers. Some of these investments have astronomical tax rates, and others are not regulated in any way by any official body.

It’s clearly important to understand that there are specific risks and complications to be found in the world of Alternative Investments. This world should not be entered lightly. Novices should never attempt to navigate it alone.

When attempting to incorporate an Alternative Investments into your portfolio, it’s important to use caution and only depend on investment strategies that have already been tried and proven. Leave the showy new forms of Alternative Investments to other investors and focus on investments with high success rates and demonstrated track records. If your approach is conservative and you stick to the recommended portfolio allocation for these investments, you will likely do well over the long term.

Finally: Don’t allow these investments to control your portfolio. Use them just enough so that their non-correlative properties impact your portfolio without taking it over. With few exceptions, don’t let these investments eat up more than ten to 20 percent of the total worth of your investment portfolio. Alternative Investments done the right way will provide you with higher-than-average returns.