Wednesday’s Word: Alternative Investments

By Michael Williford, Spring 2016 Student Intern

The past several years have seen a rise in the popularity of “Alternative Investments,” an amorphous class of investment options that include everything from private equity funds to baseball cards, including sophisticated and volatile categories like rare metals, derivative contracts and art. Alternative Investing as a strategy grew in popularity as returns on more traditional investments nose-dived during the throes of the Great Recession.

So, what does the term really mean?

Alternative investments are defined as investments that are not stocks, bonds or cash—the traditional classes in which average investors place most of their investment assets. In addition to the above examples, Alternative Investments include Non-traded Real Estate Investment Trusts (REITS), “funds of hedge funds”, Exchange-Traded Products that track alternatively weighted indices, structured retail products, floating-rate bank loan funds, and securities based lines of credit.

Most alternative investments are held by institutional investors or high net worth individuals, as opposed average investors, because they are high risk, complex, subject to less regulation than traditional investments, and are more difficult to withdraw from than traditional funds.

Alternative investments can provide attractive returns for appropriate investors. In 2014, roughly one-third of Yale University’s $23.9 billion endowment fund comprised alternative investments, and the strategy worked; the endowment enjoyed return rate of 20.2% that year—an impressive rate of return, to be sure. Comfortable investing in alternative investment funds requires a higher risk tolerance than more traditional funds. Accurately assessing your risk tolerance is a crucial first step for any investor considering the kinds of non-traditional investment alternatives discussed here. Luckily, the Financial Industry Regulatory Authority (FINRA) has advice to help the average investor assess his or her risk tolerance before making significant investment decisions.

Information abounds, and a penny of prevention is worth a pound of cure. Do your research and don’t be afraid to ask your broker the hard questions.