Interest in alternative investment has been growing rapidly due to its often steadier and higher returns, in comparison to traditional investments. The industry is expected to grow by 59% by 2023; reaching $14 trillion. This is a substantial growth from $8.8 trillion at the end of 2017.
Although alternative investments have been around for a while, they have not been advertised at the same rate and depth as stocks and bonds, making it harder for people with already limited financial literacy to learn about them. So let’s take a look at what alternative investments are and the types of investments a person can choose from.
By definition, alternative investments are financial assets that are not publicly-traded or part of traditional categories such as stocks, bonds, GICs and mutual funds. Alternative investments also include tangible assets such as real estate, precious metals, antiques, art and even comic books.
There are different types of alternative financial investments that people could invest in such as private equity investments, real estate investments and Hedge funds.
Types of alternative investments
Private equity is an investment type where the capital invested is not listed on a public stock exchange. Some are hedge funds that are set up as limited partnerships and help to restructure other companies that are not publicly traded. This type of investment typically favours high net-worth individuals due to the significant capital outlay and the time needed for such an investment to yield returns often being many years.
Investing in real estate has been common for centuries and has shown to be very profitable. The typical real estate investments involve buying a property, whether residential or commercial, and collecting monthly rent from it. Another way to invest is renovating, or ‘flipping’ houses, and selling them to obtain a profit. What many people don’t know is that there are other ways to invest in real estate.
REITs, or, Real Estate Investment Trusts are companies that own or finance real estate that produce income. They often specialize in specific verticals such as shopping centers or storage firms or student housing for example. These companies offer valuable returns in the form of dividends. Some of these companies are publicly traded, but not all.
MICs or Mortgage Investment Corporations are pools of mortgages where investors can purchase shares in. Investors can use TFSAs, RRSPs, RESPs and many other accounts to receive their interest income on a monthly, quarterly or annual basis.
Another type of real estate investment includes Syndicated Mortgages. In this investment, one or more investors become lenders to a project developer, in order to build condos or single-family homes or commercial buildings. Single residential mortgages can also be syndicated. With syndicated mortgages, investors can choose which projects they will invest in and can also have the security of their name being registered as a charge holder on the property.
Hedge funds use pooled funds where different strategies are used in order to receive high returns. Hedge funds tend to be high-risk investments as the capital may be invested in volatile stocks such as cutting-edge technologies, biomedical technologies and pharmaceuticals, among others. These investments are usually accessible to accredited investors (high net-worth) due to high capital requirements.
All in all, alternative investments have the potential to provide investors with higher-than-usual returns. These investments, of course, involve risks but are known to provide people with a steadier and more reliable source of income. It is important to note that although this article provides you with a higher-level explanation of some of the alternatives, you should always review them with an exempt market dealer and do extensive research with regards to the channel in which you will invest your capital.