Real Estate and Investments

Alternative investment is an investment or an asset that falls outside the conventional types of investment such as stocks, bonds, and cash (Athanassiou, 2012). Examples of alternative investments include real estate, derivatives, hedge funds, private equity, venture capital, commodities (e.g. precious metals), peer-to-peer lending, and collectibles (e.g. art). Compared to conventional assets, alternative investments are subject to fewer or less stringent regulations. Additionally, most alternative investments involve higher minimum investments, more complex fee structures, and lower transaction costs (Lee, 2015). Other features that distinguish alternative investments from conventional investments include lesser liquidity, lack of provable performance information, and valuation difficulties. Due to these characteristics, an individual considering alternative investments must carefully consider the available options and their associated conditions before making the final decision. In this paper, I compare different forms of alternative investments and justify the investment I would choose.

Since alternative investments often have little or no correlation with conventional asset classes, they are usually suitable options for anyone interested in diversifying their investment portfolio. For me, real estate investment trusts (REIT) provides one of the safest forms of alternative investments. REITs are investments that enable an investor to earn returns from real estate property without necessarily buying the property (Lee, 2015). In other words, one does not need to become a landlord. Instead, the investor allows experts to invest in real estate on their behalf. However, this does not necessarily mean becoming a landlord is a bad thing. With land, you can get a bank to finance a property. A major advantage of real estate property is that rental income is almost guaranteed.

Other forms of alternative of investments may be attractive but not as attractive as REITs. For instance, as private equity often involves investing in startups, there are substantial risks involved. It is known that many startups do not survive past three to five years (Lee, 2015). Not unless the startup is a sweeping idea with immense potential for growth, the startup may collapse before the anticipated exit event. For an investor looking for a safer investment like me, therefore, private equity is quite an unattractive option. Closely related to private equity is venture capital, which specifically involves investing in early-stage or growth-stage companies (Athanassiou, 2012). Though venture capital returns may be high, the risks can be extremely high similar to private equity.

Another alternative investment I would contemplate is hedge funds. Hedges funds are funds pooled from numerous investors with the aim of investing in various types of assets (Anson, Fabozzi & Jones, 2011). The investment involves techniques such as arbitraging. Dissimilar to private equity and venture capital, hedge funds are usually invested in liquid assets such as stocks. This makes them somewhat attractive compared to most alternative investments. Furthermore, hedge funds provide protection against market volatility. Nevertheless, a major limitation is that hedge funds are complicated and require huge investment amounts. Therefore, I would not consider hedge funds over REITs.

I would also consider derivatives. Derivatives mainly include options, swaps, futures, and forwards. These investments basically involve an agreement between an investor and another party to buy a given asset at a certain price and on an agreed future date (Anson, Fabozzi & Jones, 2011). While derivatives are usually viable ways of reducing investment risk, they tend to be complex and often involve huge sums of money. In fact, though they can be accessed by individuals, derivatives are usually bought by big institutional investors.

Commodities, collectibles, peer-to-peer lending, and starting own business could also be alternatives. Nonetheless, these options may not provide more attractive returns than real estate or may be quite risky. For instance, valuing commodities and collectibles can be rather difficult. In addition, though they generally do not respond to usual market cycles, collectibles and commodities can experience shifts that may make them risky. For example, a huge supply of a given commodity may cause a dramatic reduction in the price of the commodity. As for peer-to-peer lending, the risks could even be higher as you often lend money to borrowers who are unable to acquire credit from banks and other conventional lenders due to their risk profile. The option of starting own business can also be risky. As mentioned earlier, the rate of failure of startups tends to be quite high, especially in industries without high growth. If the startup fails, your entire investment could be lost. Therefore, I would not consider commodities, collectibles, peer-to-peer lending, and own business over REITs.