When inflation spikes, we all feel the change. From grocery price spikes to all-time high increases in gas prices, most of the economic discourse in America today in some way or another comes back to rising inflation. What is an Alternative Investment?

Inflation is affecting nearly every industry and area of the economy and investment strategies and returns are no different. If your current investment strategy relies heavily on the performance of bond rates, inflation can be especially detrimental.

In most investment strategies heavily reliant on interest rates, the longer the term to maturity the higher the yield will be. When interest rates are on the rise, however, longer term bonds are affected the most. Investors most commonly buy fixed income securities for a more stable income stream and low volatility. As interest rates rise, however, the interest on most fixed income securities remains the same until maturity, lowering the purchasing power of interest payments.

During inflationary periods, investors concerned with inflation levels and consequent market volatility may need to explore other options in order to strengthen their portfolio.

Alternative investments and related strategies aim at investing in assets that have less interaction with interest rate movements and equity valuation and emphasize on capitalizing on trends in niche markets where performance is less related to public equities and bonds.

Requirements for Accredited Investor

Certain alternative investment assets require individuals to accredited investors in order to purchase. The Securities and Exchange Commission (SEC) defines an accredited investor as an individual with a net worth of over $1 million; not including their primary residence (individually or with spouse/partner). An accredited investor must also have an income over $200,000 individually or $300,000 with their spouse or partner in each of the prior two years and expects the same or more income for the current year.

What is an Alternative Investment?

An alternative investment is a financial asset that does not belong to one of the Private investments categories. Conventional investment strategies include cash, bonds, and stocks. 

Alternative investment can include anything from private equity or venture capital to hedge funds; managed futures, art and antiques, commodities, or even derivative contracts. Real estate is commonly categorized as an alternative investment as well.

Most alternative investments have fewer regulations from the U.S. Securities and Exchange Commission but lack the liquidity of traditional investment assets. It is important to note that alternative investing comes with a variety of risks.

The most impactful risk is the lack of day-to-day liquidity that is common amongst traditional investment strategies. Most semi-private investments will provide liquidity either monthly or quarterly. This means that if an investor would like to sell their investment they would have to wait until a designated; predetermined period either monthly or quarterly.

Historically, returns for many alternative investment sectors have been on an upward trend. As more investor dollars introduced to these funds, the strong upward trend may begin to flatten.

Because of their complex nature, lack of regulation, and degree of risk alternative investments will typically have a high minimum investment and fee structure especially when compared to mutual funds or exchange-traded funds (ETFs). Alternative investments also publish less verifiable performance data to advertise to potential investors.

Although initial investments into alternative investments are typically high; transaction costs are typically lower than conventional assets due to a lower turnover level.

Private Real Estate

A private real estate fund (REIT) a professionally managed fund that invests in the real estate market. Private REITs are not registered or regulated by the SEC allowing them the ability to purchase and rehabilitate properties without SEC restrictions imposed.

When investing in an REIT, look for funds that have a diverse selection of properties that are spread over a large geographical area across the United States. Although there are a variety of broad real estate markets; certain areas of the real estate market have more growth potential. Multi-family residential real estate, preferably in the sunbelt states where population growth is constant and employment opportunities are present; represent the best asset for future gains in the private real estate market.

Private Credit

Private credit refers to loans or bonds that issued to companies and those assets held on the lender’s balance sheet rather than sold to an investor. Also, Private loans tend to be the most common in the capital structure, often secured by company assets.

The yield private credit investors may realize has been historically higher than those found in public markets. The appeal from private credit has been on the rise in the eyes of companies regardless of higher interest rates borrowers tend to pay. The private credit market is defined by a much more efficient transfer of capital than the public market and private credit loans can be structured in a flexible manner according to the needs of the borrowers and lenders alike.

The investment objective of a private credit fund is to generate income and long-term capital appreciation; where returns are similar to a traditional high yield bond fund but with less risk of volatility.

Closed-End Interval Fund

Due to the massive evolution undertaking the investment industry over the past decade; assets and funds that were traditionally only accessible to institutions and endowments are not becoming available to retail investors. Amongst these closed end interval funds, which fund traded on an exchange allowing for daily purchases.

Selling the asset, however, is only allowed in certain predetermined intervals, in most cases on a quarterly schedule. The benefit of closed end interval investments is it allows investors the ability to purchase assets in niche markets that have little to no correlation or relation to other assets in the investor’s portfolio.

Some common closed end interval assets residing in niche markets include specialty financing, litigation financing, royalties, and trade financing. For more information on these niche markets visit the link to the article found in the section below.

Additional Resources

Although it is a good time to diversify your portfolio to combat rising inflation; it is always wise to remind yourself of the reasons you are invested in the first place. Stay focused on your goals.

Even when the investment does not involve unique items such as digital art or coins; some alternative investments are prone to investment scams and fraud due to the lack of regulation.

Having a financial advisor guiding you through your investment strategy is a step in the right direction to make sure your investments are a good fit. Furthermore, do your own research to find additional information on any alternative investment asset you are interested in pursuing.

Looking for your next steps, visit Fragasso Financial Advisors’, Pittsburgh financial advisors, article for more information on alternative investments that are right for you.

Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.