Alternative Investments(by Hiranmayi Srinivasan)

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity (PE) or venture capital (VC), hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple Inc. (AAPL) due to a limited number of buyers. Investors may even have difficulty valuing alternative investments, since the assets—and transactions involving them—are often rare.

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Why Is 'Alternative Investments' the Term of the Day?

BofA Global Research

As worries about a credit crunch rise, bearish sentiment is driving investors to shift their allocations in favor of fixed income and alternative investments. Global fund managers surveyed by Bank of America earlier this month were most overweight cash and alternative investments, and had a greater share of assets allocated to bonds compared to stocks than at any time since the global financial crisis.

A survey by alternative funds administrator Ocorian found that family offices (private wealth advisory firms) are also expected to significantly increase their allocations to alternative investments over the next year. About one-third of those surveyed said they plan to increase allocations to real estate and private debt by 50% or more over the next two years.

Because of their unique nature and differences from traditional asset classes, alternative investments may have low correlations to traditional investments such as stocks and bonds. As a result, investors often turn to alternatives to potentially help diversify an investment portfolio and reduce overall portfolio risk.

-Hira