If you’re wondering why everyone seems to be talking about alternative investment funds these days, a growing number of investors are starting to look beyond stocks and bonds for opportunities. How does alternative investment work? What are the best alternative investment funds in the long list of options?
Economic conditions have a huge influence on how investors structure their portfolios. There are times when investors are attracted to stocks in general or stocks in particular sectors such as EV stocks or oil stocks. Other times, investors will rush to bonds or they might seek opportunities outside the conventional markets.
What are alternative investments?
Alternative investments are also called “alternatives” or simply “alts.” These are investment opportunities that exist outside the traditional stock and bond markets. Investors look to the alts to diversify their portfolios, generate income, or boost returns.
A hedge fund may pool money from investors to short a stock. If the call turns out to be right, the returns can be lucrative. A private equity firm invests in shares of private companies. A venture capital fund provides capital to a startup in exchange for a stake and management role in the business. These types of investments can produce profit even when the stock market is tumbling.
How do alternative investment funds work?
Alternative investment opportunities are typically difficult for small investors to access. For example, you may need to be an accredited investor to participate in private equity investment or venture capital funding. To be eligible for consideration as an accredited investor under SEC rules, you would need to have a net worth of at least $1 million or a certain level of trading experience.
Apart from requiring accreditation, many of the alternatives have a minimum capital requirement that can be as high as $1 million or more. Most retail investors fall short of these requirements. At times, alternative investment funds remove the accessibility barriers for small investors. For example, you may get exposure to a basket of private company stocks through a standard ETF.
What are the best alternative investment funds in the long list?
In addition to making alternative investments accessible to retail investors, alt funds also address several drawbacks that come with these investment products. For example, you may face liquidity challenges when you invest directly in private equity.
Other alternative investments also come with high management fees that can erode returns. If the alternatives are packaged into a public fund, you can easily trade them and the costs, expressed as expense ratio, are usually low. These are some of the popular alternative investment funds:
The Invesco Global Listed Private Equity (PSP) gives exposure to private company stocks. It has an expense ratio of 1.44 percent.
The Invesco DB Commodity Index Tracking Fund (DBC) offers exposure to the most traded commodities. The expense ratio is 0.85 percent.
The iShares Residential and Multisector Real Estate ETF (REZ) lets you become an indirect landlord in residential housing. Its expense ratio is 0.48 percent.
The Global X SuperIncome Preferred ETF (SPFF) invests in companies’ preferred shares that usually come with dividends. The expense ratio is 0.58 percent.
The Anfield Capital Diversified Alts ETF (DALT) gives you exposure to a basket of alternative investment funds. The expense ratio is 2.22 percent.