Alternative investments encompass any form of financial asset other than traditional portfolio holdings such as stocks, bonds and cash. This could range from direct lending and private equity through hard assets such as farmland and intellectual property to antiques as alternative forms of investment.
Alternative investments typically have longer investment horizons and lower liquidity (the ability to convert into cash quickly). But they could offer potential advantages.
Diversification
Diversification is an integral component of business risk mitigation, protecting portfolios against volatility and making sure profits remain steady. Successful investors understand the need to spread risk across different asset classes so if one type takes a hit, others may help offset it. But properly diversifying requires ongoing rebalancing which takes time.
Alternative investments can add variety and diversity to a business portfolio, providing non-traditional investment options like startup equity, securitised debt instruments, hedge funds and fractionalised commercial real estate. They often exhibit low correlation with public markets while offering unique return characteristics.
However, their increased complexity can increase costs and risks significantly. For example, investments may use leveraged capital to magnify potential returns, potentially increasing losses during market downturns. They often lack transparency and require longer investment horizons than traditional assets; also less regulated than public assets can make it challenging to evaluate these assets properly.
Tax efficiency
Alternative investments provide tax-effective investing opportunities that may help business owners reduce income taxes while meeting investment goals. Strategies include 1031 exchanges and Opportunity Zone investments as well as real estate investing which provides tax deferred or tax free investing solutions that may reduce tax burdens while expanding wealth.
Tax efficient investing is especially critical for investors with higher tax rates, as after-tax returns matter more than pre-tax returns. Therefore, investments which lose less earnings to taxes should be placed in taxable accounts while those which generate more capital gains or dividends should be placed into tax-advantaged accounts.
Tax-efficient investing requires an in-depth knowledge of financial markets and taxation regulations, so seeking professional guidance from certified tax professionals* may be invaluable in optimizing your portfolio for maximum savings. Working with an established financial institution like First Western Trust will also facilitate this process while guaranteeing compliance with regulatory frameworks.
Liquidity
Liquidity refers to the amount of cash and marketable assets a business has available to meet short-term obligations, including cash, marketable securities, accounts receivable (money owed from customers for goods or services purchased on credit), inventory and the ability to quickly convert current assets into cash when necessary.
Alternative investments refer to non-traditional financial assets like private equity, hedge funds, real estate and commodities that offer higher return potential than their traditional asset counterparts, provide diversification value and are usually less volatile than public markets.
However, they can be illiquid and require longer investment timelines than traditional investments. Furthermore, they often carry higher management fees, specialized share classes, and require extensive due diligence reviews of managers, structures and accounting; hence they are usually reserved for institutions or high net-worth individuals with extensive liquidity needs that need meeting quickly such as portfolio rebalancing requirements or capital calls from private investments.
Flexibility
Flexibility is essential to successful project portfolio management. It enables you to respond swiftly to changing market conditions while staying true to project goals, mitigating risks and optimizing decision making processes.
Alternative investments are specialized strategies used to diversify a business portfolio. They tend to fall outside traditional asset classes like stocks, bonds and cash and may possess higher volatility than these investments. To avoid overpaying for these alternatives, make sure you thoroughly investigate them prior to adding them into your portfolio.
Strategic flexibility is a new framework designed to equip organizations for unforeseeable futures. It combines principles of real options trading and scenario building to enable flexible capacity planning. Companies may use scenario building for such things as stabilizing annual real estate budgets and headcount forecasting; limiting up-front capital investment; measuring utilization rates (square footage per employee); as well as other metrics. In so doing they can save money and avoid wasteful investments altogether.
