Alternative Investment: Meaning, Types, Services

If stocks and gold are the first choices that come to your mind when you think of investments, then it’s time to change things up. In the last few years, investment avenues in the country have evolved far beyond the traditional investment ecosystem and now include opportunities tailored to the specific needs of the new-age investor. 

Traditional investment avenues are now losing appeal as they offer lower real returns due to inflation and tax implications. Stock market investments have been highly unpredictable in terms of returns, with sharp price swings due to global economic uncertainties. Additionally, government-backed bonds and other fixed-income assets offer comparatively lower yields, prompting investors to seek alternatives with better risk-adjusted returns.

With the introduction of less-conventional financial instruments, also known as alternative investments, high and ultra-high-net-worth individuals (HNIs and UHNIs) have started exploring new opportunities to grow their wealth. 

Here is an overview of some popular alt investments that you can explore to diversify your portfolio and create better risk-reward opportunities. 

What Are Alternative Investments? 

Alternative investments, also known as alt investments, are financial instruments that fall outside the conventional asset classes of equity, bonds, gold, and cash. 

Unlike traditional investments, they have a unique risk-return profile and don’t highly respond to the movement of financial markets. 

• Assets like real estate, private equity, and infrastructure investments require longer holding periods before investors can get any substantial returns. 
• They often require high capital commitments and may be restricted to institutional investors or high-net-worth individuals (HNIs).
• Lastly, they do not have a standardized market price and rely on complex financial modelling or expert valuations.

Some examples of alternative investments include private equity, hedge funds, real estate, commodities, infrastructure investments, and cryptocurrencies. 

These instruments are usually more suitable for HNIs and Ultra HNIs who are looking to diversify their portfolio. Most of these assets have complex valuation systems, lesser liquidity, and a higher risk profile and hence need specialised knowledge for investment.

What Are Some Types of Alternative Investments?

Alternative investments don’t respond to market volatility in the same way as stocks and bonds do; thus, they require a separate understanding of their complex nature.

Private Equity 

Private equity involves investing in an unlisted private company with a strong potential for growth. It is like investing in stocks, but these shares are not publicly traded in the equity market. In this alternative investment strategy, money is pumped into mature and established companies to improve their operations, market acquisition, product development, etc. 

Private equity also has a subset – venture capital investing, which primarily focuses on startups and early-stage businesses. By supporting these companies in growth and development in their early stages, private equity investors capitalise on value creation in the long run. 

Hedge Funds 

Hedge funds invest in a wide range of assets, like debt, equity, currencies, commodities, derivatives, etc, to diversify their portfolio and hedge their investments. They utilise complex strategies like short selling, leveraging, and derivatives trading to maximise their returns. While some of the highly leveraged strategies can amplify risks, diversification protects the assets in volatile markets. 

Unlike mutual funds, this alternative investment solution has fewer regulations. However, the risk profile and large capital requirements make it inaccessible to retail investors. Hedge funds also involve complex strategies, require higher leverage, and have limited liquidity. Only HNIs and UHNIs who are considered accredited investors and institutional investors can invest in these funds.

Real Estate 

Real estate investment includes tangible properties and property-based securities such as real estate investment trusts (REITs) and mutual funds. It is the most popular tangible alternative asset in the Indian market. 

Physical properties generate fixed income through long-term rental payments and capital appreciation. Individual retail investors can invest in real estate through REITs and real estate-focused ETFs. 

The value of real estate properties remains unaffected by the price movements of the financial markets. Investing in real estate can diversify your portfolio and protect your money against adverse market movements. 

However, there are illiquidity concerns related – unlike stocks or mutual funds, real estate cannot be quickly sold and the entire process is highly time-consuming. Changes in real estate laws, taxation policies, or government regulations can also impact property values. 

Real estate also follows market cycles—boom, stagnation, and correction phases. Such economic downturns can also affect real estate values. 

Commodities 

Commodities are physical goods, including precious metals, agricultural products, industrial metals, and energy resources. The price of this alternative asset is sensitive to the change in demand and supply in the international commodity market and can, therefore, be considered quite volatile. This is due to the interconnected trade and supply chains, which can have a huge impact on the domestic commodity market.  

Individual investors can invest in these commodities by trading derivative contracts and ETFs in the commodity exchange. You also choose to hold physical commodities like gold and book profits based on price changes. Commodities, particularly gold and oil, serve as effective hedges against inflation and currency depreciation due to their intrinsic value and global demand.

Infrastructure Investments 

Infrasture investments are similar to real estate investments. They invest in roads, bridges, highways, sewage systems, energy, utilities, and other infrastructure development projects in the country. Over the last few decades, this alternative investment solution has provided investors with attractive risk-adjusted returns and strong, stable income. 

Government-backed infrastructure projects often give predictable cash flows with minimal chance of failure of payments. However, private infrastructure investments may carry higher project execution risks. HNIs can invest in these projects through different infrastructure investment trusts (InvITs) or thematic mutual funds directed towards such projects. 

AIF Investment (Alternative Investment Funds) 

Alternative Investment Funds(AIF) are an asset class gaining popularity in India. An alternative investment management company runs these funds. Unlike traditional mutual funds, SEBI’s regulatory standards do not regulate these funds. AIF investment funds pool money from high-net-worth individuals, institutions, and family offices. 

They invest in diverse assets ranging from venture capital to hedge funds to diversify portfolios, manage risks, and provide exposure to non-conventional asset classes. They are characterised by lower liquidity, high return potential, and a higher risk profile. Here’s a brief overview of AIF categories as per SEBI: 

• Category I: Venture capital funds, infrastructure funds, angel funds, social venture funds (higher risk, government incentivized).
• Category II: Private equity, debt funds, REITs (moderate risk, professionally managed).
• Category III: Hedge funds, arbitrage funds, Quant funds (high-risk, market-driven strategies).

Cryptocurrencies & Digital Assets 

With the emergence of different types of alternative investments in the past few years, cryptocurrencies like Bitcoin and Ethereum have gained vast popularity. These are forms of digital currency that operate on blockchain technology. However, the returns can be highly speculative, especially because the realm of cryptocurrency is not yet regulated in India. 

It is vital to note that most alternative investment solutions don’t have any regulatory standards yet. Retail investors can trade in these currencies on crypto exchanges, which charge higher fees. A recent development in this sector has also led to the emergence of crypto ETFs. 

Should You Invest in Alternative Investments? 

Investing in alternative investments offers several benefits that appeal to non-traditional investors. Here’s why you should invest in alternative assets:  

• Alternative investment assets have a low correlation with financial markets and are unaffected by adverse movements. Hence, they will diversify your portfolio and provide a hedge against inflation. 
• These assets are not traded on public exchanges, so they are less volatile. They are also not governed by strict regulations, so they can offer flexible alternative strategies to manage the risk-reward ratio. 
• Alternative assets are not confined to building wealth only. They oftentimes target personal interests and the causes you want to invest in. For example, investing in start-ups could help you support a cause you believe in while also generating wealth through private equity investments.
• Alternative investment assets carry significant risk, but they also offer the potential to give market-beating returns. Hegde funds, real estate, and private equity have delivered greater returns. 
• Some of these investments, such as real estate and infrastructure, provide stable, passive income and long-term capital appreciation. 

Over the last decade (2010-2021), private equity has consistently outperformed traditional investments. A study found that 17 out of 21 private equity strategies delivered double-digit returns, while equities and bonds saw average annual returns between 3% and 8%. 

Cryptocurrencies like Bitcoin have shown significant volatility but also the potential for high returns. For instance, Bitcoin’s price increased by over 50% in 2021 alone, though it also experienced substantial price swings. 

Here’s a table to show the return trends of various popular alternative investment avenues: 

Asset	Average Annual Return (approx.)
Private Equity	+14%
Real Estate (REITs)	+8%
Hedge Funds	+6%
Cryptocurrency	Potential for High Returns (Highly volatile)
Infrastructure	+8-10%

Challenges of Investing in Alternative Assets 

These non-conventional alternatives to investing also come with unique risk factors that make it challenging for new investors. Here are a few challenges faced by them: 

Liquidity Risk 

Alternative strategies like private equity and hedge funds have a long lock-in period without redemption options. Because they are not publicly traded, they are often associated with valuation complexities and can be hard to liquidate. Additionally, private assets (real estate, PE, hedge funds) often lack transparent pricing, making it difficult to value them accurately.

Regulatory Risk

Several alternative assets are not strictly regulated and follow a flexible investing approach, often leading to transparency challenges and hindering investors’ access to information. 

Accessibility Risk 

The AIF minimum investment requirements are huge and often focus on high-networth individuals and institutional investors, limiting accessibility for many retail investors. 

Alternative Investment Management – How to Get Started 

Getting started with investing in alternative investments might seem overwhelming to newbie investors. Here’s a breakdown of strategies to get started with various forms of alternative assets: 

• You can invest in private equity through private equity firms, venture capital funds, or crowdfunding platforms. 
• Investors with lower funds can participate in real estate investments by purchasing REITs and units of real estate mutual funds. 
• Hedge funds are mainly available to institutional investors, but you can invest in hedge funds through hedge fund managers or brokers. 
• Retail investors can invest in cryptocurrencies through cryptocurrency exchanges, brokers, or online platforms. 

However, before investing, investors should evaluate their risk appetite, investment horizon and liquidity needs to make sure the asset’s returns align with your financial goals. 

Alternative investment solutions provide exposure to non-conventional asset classes; however, they are less liquid and face regulatory and transparency challenges. Hence, assessing your risk appetite and financial requirements is essential to make an informed choice about alternative investing strategies.  

Frequently Asked Questions