When you hear the term investing, you tend to think of traditional investments that most people are familiar with. These are usually cash in your savings account, some of your favourite companies’ stocks or bonds. 

However, there is a whole other investment universe beyond traditional investment options, called alternative investments. These investments usually serve as options for investors looking to diversify their portfolios* or to take on additional risk to potentially generate higher returns. Alternative investments can be identified as any asset that doesn’t form part of these traditional asset classes*. 

Alternative Investments vs Traditional Investments

For the past decade there has been a shift towards investing in alternatives due to investors looking to increase their investment returns in weak global economic conditions. The main reason investors add alternative investments to their portfolios are for the perceived low correlation* to traditional investments. A reduction in traditional investment returns could mean an increase in alternative investment returns which provides portfolio diversification and reduced volatility.

Alternative investments typically display some of the following characteristics: 

  • The management fees are higher compared to traditional investments, making them more expensive to invest in. They also typically have higher minimum investment amounts.
  • They tend to be less liquid assets, meaning that the assets can’t easily be converted into cash. 
  • There are different legal issues and tax treatment for alternatives which can either be more or less favourable. 

Real World Alternative Investments

Investing in alternative assets has become more accessible to individual investors. Modern-day types of alternative investment are hedge funds, private equity funds, art and wine, and even cattle. 

Hedge fund managers use specific techniques to generate higher returns, regardless of the current market conditions. Hedge funds usually invest in a wide range of higher risk assets. 

Private equity funds invest in companies that are not publicly traded thus not listed on a stock exchange such as the JSE.

A demand for art and wine as luxury investment options were established due to wine being something to drink and enjoy, and art something to look at and appreciate. However, you’ll need to do all your research before you invest in these tricky assets as they are driven by desirability. 

One of SA’s most exciting alternative investment options can be accessed through an app called Livestock Wealth. You as investor will have the option to buy the young asset (livestock or plant-based) from the farmer, whereafter the farmer grows the asset and buys back the fully grown livestock or crop from you.

These investments can be complex, expensive and risky. Although they may present benefits to investors, a healthy caution is smart when considering these investments. As Warren Buffet says, “Keep it simple. If you have to go through too much investigation, something is wrong.” Your willingness to walk away from an investment you don’t fully understand can lower your risks.

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Marnia has joined the 22seven team as a Slice and Blog writer. She’s currently gaining exposure to financial reporting and forecasting at De Beers Group, as well as pursuing the CFA designation. She has a passion for the ever-changing and hyper-competitive world of business. Continuous improvement and endless development are what interest her on a daily basis. Her love for running and the outdoors keeps growing, as nature is always constant and honest, so it is there where she finds her peace.
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