Takeaways
- Alternative investments are financial assets outside of stocks, bonds, and cash.
- Alternative investments are not as heavily regulated by the SEC and other agencies.
- Alternative investments tend to be less liquid than traditional investments.
- Alternative investments are attractive to institutional, accredited, and retail investors.
- Alternative investments include cryptocurrencies, real estate, commodities, collectibles, and other securities.
Professional and seasoned investors know the value of diversifying their portfolios. Whether you are a beginner investor or an accredited investor, understanding how alternative investments work enhances your investment skills, allocates risk, and has the potential to boost returns.
Alternative investments encompass a wide range of asset classes beyond traditional investments, like stocks and bonds. They entice investors with high returns but also tend to come with more investment risk, low liquidity (making it difficult to buy and sell quickly), and require specialized knowledge or expertise to evaluate and manage.
Below, we explore the definition of alternative investments and how to start investing in them today.
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What Are Alternative Investments?
Alternative investments are financial securities or assets other than stocks, bonds, or cash. The good news for investors exploring alternative assets is that they can gain exposure to different securities. Alternative investments are more illiquid than investments in major stock or bond indexes and require a degree of sophistication to capture value.
Investors tend to specialize in different types of alternative investors. For example, there are whole hedge funds dedicated to investing in convertible debt for private companies. Alternatively, there are investment shops that focus exclusively on emerging cryptocurrencies.
You don’t need to be a professional investor to earn above-market returns. Get started by exploring some of the best alternative investment ideas of 2025.
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7 Best Alternative Investment Ideas
The specific mechanisms and strategies for investing in alternative assets vary greatly depending on the asset class. Here are seven alternative investment ideas and how each one generates a return:
- Real Estate: There are many ways to start investing in real estate. You can start investing in residential homes, multi-family units, commercial buildings, or raw land. You can generate returns through rental income, property appreciation, and capital gains. (Read more about REITs).
- Private Equity: Sophisticated investors invest in private equity funds, which pool capital from accredited and institutional investors and select promising private companies to invest in. Investors earn money through selling their stock to other investors or through the eventual sale of the portfolio company. Investing in private companies, like startups or established businesses, that are not publicly traded on a stock exchange can boost your portfolio.
- Hedge Funds: Hedge fund managers employ a variety of sophisticated investment strategies to earn investment returns, such as leveraging, short selling, and trading arbitrage. These portfolio managers adopt active investment strategies and specialize in investing in specific industries. Hedge funds are designed to provide flexibility to make money in a bull market or bear market.
- Commodities: Investors can invest in commodities through futures contracts, exchange-traded funds (ETFs), or purchasing physical commodities. Investing in raw materials such as gold, oil, agricultural products, and industrial metals offers excellent avenues to gain exposure to these markets. Commodities tend to be more liquid than other alternative investments because they can be traded on exchanges, like the Chicago Mercantile Exchange.[1]
- Cryptocurrency: Investors can buy and sell cryptocurrency currencies on cryptocurrency exchanges, trade them for other cryptocurrencies, or use them to purchase goods and services. Investors can gain exposure to crypto by investing in digital currencies like Bitcoin or Ethereum. Alternatively, they can invest in Bitcoin ETFs or digital assets that operate on blockchain technology.
- Collectibles: Adding collectibles to your investment portfolio can be a smart money move. Tangible assets like fine art, antiques, rare coins, watches, vintage wine, and other unique items can be a great way to gain exposure to alternatives. The value of collectibles can appreciate over time due to factors like rarity, demand, and historical significance. Investors earn money by adopting a long-term “buy-and-hold” investment strategy to collectibles and wait for value appreciation.
- Private Debt: You can invest in private debt by investing in loans to private companies or individuals, such as private mortgages, mezzanine debt, and distressed debt. (Read more about payday loans). You can generate returns on private debt through interest payments and principal repayment. (Read more about how personal loans work).
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Traditional vs. Alternative Investments
Investors consider assets like publicly traded stocks, bonds, and cash to be traditional investments. Traditional investment tends to be very liquid, allowing for easy and swift exchange of assets to determine a fair market value. Traditional assets are also regulated by government agencies like the Securities and Exchange Commission, Federal Reserve, and Federal Deposit Insurance Corporation.
Alternative investments, on the other hand, are almost the polar opposite of traditional investments. They are much more illiquid than publicly traded stocks on major stock indexes. While some, like Bitcoin, are traded on cryptocurrency exchanges, most are not as regulated as traditional investments. This lack of regulation means less required disclosures about investments and risk profiles.
Read More: How an Initial Public Offering (IPO) Works
Industries to Explore in 2025
Traditional portfolios sometimes need a jolt of originality. If you are looking for new investment ideas, here are seven investment industries to explore this year:
1. Renewable Energy: Investing in renewable energy projects or bonds, such as solar, wind, and hydropower, offers the potential for both financial returns and environmental impact. (Read more about municipal bonds).
2. Artificial Intelligence (AI) and Machine Learning: Investing in private companies developing and utilizing AI and machine learning technologies can provide exposure to cutting-edge innovation and potentially high growth.
3. E-commerce and Digital Commerce: With the continued growth of e-commerce, investing in companies involved in online retail, logistics, and digital commerce can offer significant growth potential.
4. Healthcare Innovation: Investing in companies developing innovative healthcare solutions, such as telemedicine, gene therapy, and personalized medicine, can offer both financial returns and the potential for positive social impact.
5. Cybersecurity: With the increasing threat of cyberattacks, investing in cybersecurity companies that provide solutions for data protection, threat detection, and incident response can be a valuable opportunity.
6. Impact Investing: Impact investing focuses on generating both financial returns and positive social or environmental impact. This can include investments in companies that address social issues such as poverty, inequality, and climate change. (Read more about ESG investing).
7. Space Exploration: With the resurgence of space exploration, investing in companies involved in space technology, such as satellite communications and space tourism, can add new names to your portfolio.
Read Also: 9 Ways to Earn Passive Income
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Pros of Alternative Investments
- Potential for High Returns: Many alternative investments, like crypto and commodities, offer the potential for higher returns than traditional investments. These higher returns can be particularly attractive in periods of low interest rates and slow economic growth. (Read more about how the Federal Reserve controls interest rates).
- Diversification Benefits: Alternative investments can help to diversify an investment portfolio and reduce overall risk. By investing in a variety of asset classes, investors can mitigate the impact of market volatility and improve the overall risk-adjusted return of their portfolio. (Read more about 9 Low-risk Investments).
- Inflation Hedge: Owning alternative investments, such as commodities and real estate, can help you hedge against inflation. As inflation rises, the value of these assets may increase, helping to preserve purchasing power. (Read the 26 Ways to Beat Inflation).
- Unique Opportunities: Alternative investments provide access to exceptional opportunities not available through traditional investment. This can include exposure to high-growth companies, innovative technologies, and unique asset classes.
Cons of Alternative Investments
- Higher Risk: Alternative investments typically carry much higher levels of risk compared to traditional investments. These risks can include market risk, liquidity risk, interest rate risk, and credit risk.
- Lower Liquidity: Many alternative investments are illiquid compared to traditional investments, making buying and selling them difficult. Illiquidity can make it challenging to repurpose your investment capital. Getting your investment back might not be as easy as logging into your online brokerage account and hitting the “sell” button.
- Complexity: Alternative investments often involve complex strategies and require specialized knowledge to evaluate and manage. For example, private equity transactions can involve ratchets, earnouts, and minimum exit premiums.
- Higher Fees: Alternative investments often involve higher fees compared to traditional investments, such as management fees, performance fees, and transaction costs. Unmanaged higher fees can erode investment returns over time.
- Lack of Transparency: Many alternative investments lack the transparency of highly regulated publicly traded stocks or bonds. Because they don’t adhere to the same high disclosure standards, it is difficult for investors to understand the underlying investments and assess their risks.
Read More: Best Online Brokerage Accounts
Smart Summary
Alternative investments are financial assets other than traditional stocks, bonds, or cash. They offer an avenue to diversify your portfolio. Investors clamor to add alternatives to their portfolios for diversification, enhanced returns, and the opportunity to explore investment options beyond traditional publicly traded stocks or bonds.
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(1) CME Group. Explore the versatility of Agricultural products. Last Accessed January 29, 2025.
