Alternative investments are those made into any asset class that falls outside of the three traditional ones - stocks, bonds and cash.
Private equity is the main category within alternative investing. Other alternative investment strategies range from financial assets like cryptocurrencies, derivatives, hedge funds, and distressed securities, to tangible assets including real estate, art, wine, cars, and coins.
Traditional investments are all liquid assets, i.e. they are or can be traded into money quickly. Alternatives, on the other hand, are relatively illiquid investments. Real estate, for example, cannot be converted into money that easily - you need to first go through the market and contractual processes of selling the property.
The same goes for a private equity fund; fund managers need to exit the assets in their portfolios before cashing in on their investment. The assets in a private equity fund can be held for up to 10 years before the fund manager exits the companies held within its portfolio.
Liquidity is one of the key differences between traditional and alternative investing. In addition, prices for alternatives can be more negotiable and fluid than what they typically tend to be within traditional asset classes.
There are several different types of alternative investments. We've outlined some of the most prominent alternative asset investments examples below.
Private equity refers to investments into companies that are not listed on the public stock exchange, or that are listed but acquired to be taken private. The three main private equity strategies are venture capital (VC), growth equity and buyouts (LBO).
You can read more about private equity in ‘What is private equity?’.
Private credit is privately negotiated debt financing from non-bank lenders.
Infrastructure private equity investments include physical assets like bridges, roads and highways. One of its main selling points is that it can offer low volatility and stable cash flow.
Investing in real estate is one of the oldest forms of investments, and considered to be a low-risk and stable option. The value of real estate does not appreciate as quickly as financial assets such as private equity or venture capital investments can, however.
Collectibles are items that increase in value over time.
If you already own a portfolio of other assets and are looking to diversify, truly appreciate art, and are willing to do the research, then investing in artwork might well be for you. But bear in mind that these are high risk investments with a long term horizon.
Investing in fine wine is tax-free, and there is a limited supply of each stock. It has a low correlation to the stock market, can provide stable returns and rarely decreases in value.
Aside from cars having aesthetic value, they can also provide a currency hedge since vehicles can be moved to countries with favourable exchange rates.
Antiques that are rare and in good quality tend to increase in value over time.. With this kind of investing, you also have the opportunity to leave a legacy and it is environmentally friendly, so it scores high on ESG.
The booming watch industry provides another opportunity for investing in high-quality collectibles. A timeless symbol of craftsmanship, it is also a portable asset that leaves a legacy. Given the time it takes to produce each Rolex, for example, demand far exceeds supply and has done so since the 70s.
Hedge funds are high risk, actively managed investment funds, that typically acquire assets with borrowed capital in order to fetch higher than average returns.
Crypto assets are virtual or digital assets that are supported by blockchain tech. Highly volatile, they were created to function as a payment or exchange method online and are designed in a way that prevents their copying.
One of the top reasons to invest in alternatives is to create portfolio diversification, and the potential to enhance returns. Diversification simply means that you are not putting all your eggs in one basket. So when you diversify when creating an investment portfolio, it can create a more favourable risk/return ratio.
Alternative asset investments provide diversification to investors' portfolios because of their reduced correlation to public markets. Alternative investment strategies can also offer outsized returns and lower day-to-day volatility given the long term investment horizon.
Focusing on private equity funds, one of its core benefits is the expertise of the underlying fund managers themselves. Fund managers base their investment decisions on the knowledge they gain about portfolio companies through the firm's proprietary due diligence. These skillful hands can help their portfolio companies prosper and navigate market cycles.
The two main challenges of private equity investing are gaining access to top-tier funds and their relative illiquidity. Luckily, both of these have been addressed by Moonfare.
Prior to Moonfare, top-tier private equity and venture capital funds were reserved only for institutional investors and the wealthiest individuals. Historically, access to private equity funds was granted only at minimum investments of $25M. Beyond high minimums, private equity typically requires an intermediary, increasing the cost and complexity while reducing transparency. With Moonfare, qualified investors get access to a vetted selection of top-tier funds at minimums from €50k, transparent fee structure and digital fund reporting.
Like alternative investments broadly, private equity and venture capital investments are generally illiquid. Only as the fund’s underlying investments mature and companies exit through acquisition or IPO do investors see a return on their investments. The full fund cycle can be 10 years or more. Moonfare has partnered with Lexington Capital to create the industry’s first semi-annual digital secondary market. This allows members to buy and sell allocations to one another, bringing early liquidity to the asset class (though liquidity cannot be guaranteed).
The easiest way for individuals looking to invest in top-tier private equity funds is to use a platform like Moonfare. The platform pools commitments from all its individual investors into Luxembourg-based feeder funds, which invest directly into the underlying target funds.
This structure facilitates lowering minimum investments to a level that fits individual investors, while safeguarding their capital.
After you have made an investment, Moonfare handles all fund administration on your behalf. You can view reports at any time, both at the portfolio or fund level, and you will have a team of professionals at your fingertips.
Important Information: Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance. Your capital is at risk. Alternative investments are complex, speculative investment vehicles, are not suitable for all investors, and are restricted to qualified investors who have sufficient knowledge and experience to understand the risks of investing. Please see https://www.moonfare.com/disclaimers.