A Quick Glance at Alternative Investment Funds


An alternative investment refers to an asset that is not among the traditional investments types like stocks, bonds, and currencies.

alternative investment written on a folded newspaper

Institutional investors, as well as high-net-worth individuals typically hold alternative investment assets. This is because of the complexity of the funds and the limited regulations of the investments. Alternative investment funds include hedge funds, commodities, derivative contracts, managed futures, real estate, and private equity.

Let’s dig deeper into what alternative investment funds are.

Getting to Know Alternative Investments

If you plan to invest in alternative investment funds, you will have to incur high minimum investments, as well as fee structures when compared with mutual funds and exchange-traded funds.
In addition, you have less opportunity to release verifiable performances data and to advertise over potential investors.

The transactions are often unique. This means that you as an investor may find it quite difficult to value alternative investments. To illustrate, suppose you have an extremely rare gold coin and you want to determine its value. You’ll find that there are only a dozen or so pieces of such items around the world, making its valuation even harder to undertake.

Further, alternative investments are unregulated. This makes them prone to scams and fraud. It is your job as an investor to make sure that you conduct due diligence.

Not sure which to choose? Read ETFs vs Mutual Funds

Diversification and Hedging

Alternative investments often sport very low correlation with standard asset classes. This nature makes them very ideal for diversification.

Because of this same reason, many large institutional funds, like pensions and private endowments, have already started allocating a portion of their portfolios to alternative investments like hedge funds. They typically invest less than 10 percent of their portfolio in such investments.

Costs and Taxes

It is true that alternative investments have high initial upfront investment fees. However, transaction costs are normally cheaper when compared with conventional assets. This is all because of the lower levels of turnover.

If you hold alternative investments over long periods, you may get lucky and obtain some tax benefits. Investments held longer than one year are candidates for lower taxes for capital gains if you take them against shorter-term investments.

Access through ETFs

It is also true that a huge portion of retail investors may find it difficult to access alternative investments. On the flip side, real estate and commodities like precious metals are very much available.

Exchange-traded funds now offer sufficient opportunities to investors who wish to invest in alternative investment funds, which were previously difficult and expensive for retail investors.


Alternative investments often have no clear legal structure that many other common investments have. However, they are becoming more and more regulated by the Dodd-Frank Wall Street Reform and Protection Act.

Compared with mutual funds and ETFs, which are regulated and overseen by the Securities and Exchange Commission, alternative investments are still not as regulated.

Most of the time, only those tagged as “accredited investors” are allowed access to alternative investment opportunities. Such accredited investors have a net worth exceeding $1 million, or a personal income that reaches $200,000 or more a year.


Alternative investments may not be accessible for every investor in the market, but they offer huge advantages and benefits to those who can get their hands on them. However, a certain level of expertise and experience is needed to be able to manage and invest in them very efficiently.

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