Today’s investors are looking beyond traditional investment vehicles like stocks or bonds to strengthen their portfolios—that’s where alternative investments come into play.

Alternative investments have quickly become a top choice for many savvy investors looking to diversify their portfolios. However, like with all investments, investors must be aware of the level of risk each investment holds before diving in head first. Let’s take a closer look at the risks of alternative investments, the advantages and disadvantages, and if they’re the right investment for you.

The potential risks of alternative investments

There’s a risk with any investment opportunity, so it’s essential to do your due diligence before investing. With alternatives, in particular, there are 4 potential risks investors should consider.

Illiquidity

Many alternative investments are illiquid by nature, meaning they can’t be bought or sold easily. For example, artwork is an alternative investment that cannot be quickly or easily converted into cash for its fair market value. So, while the return on investment can be higher, it’s an industry with few buyers, so you may be holding onto that art piece for quite some time.

Lack of regulation and transparency

Alternative investments are not regulated by the SEC and do not have reporting requirements like traditional investments. The lack of regulation is certainly a risk for investors, but there can also be risks with price transparency. Because so many different types of alternatives are difficult to value, investors can run into issues with pricing and price transparency in particular.

High barrier to entry

Alternative investments are known for having higher minimum investments and fees, which makes them inaccessible for many investors.

Typically, this high barrier to entry will not only include a high minimum investment amount, but many of them will require you to be accredited ($1MM in assets or $200k+ per year for at least the last 2 years and expect the same this year), or ‘sophisticated’.  The definition of ‘sophisticated’ in this context is a bit more nebulous, but essentially, it means that you can adequately evaluate investments of a given type because of your experience or representation.

Complexity 

Alternatives tend to be more complex than traditional investments like stocks or bonds, which may require investors to do more research beforehand. However, due to the lack of regulation and reporting requirements, it can be challenging to do due diligence on your own. During the due diligence process, be sure to get answers to a few critical items:

• Insurance coverage
• Investment requirements and timeline
• Tax information
• Publicity and litigation
• Regulation issues
• Historical financials
• Sustainability and environmental issues

Pros of investing in alternatives 

While there are risks and downsides to consider, alternative investments can offer an incredible opportunity for investors to reach (and exceed) their investment goals. The 3 main benefits to investing in alternatives are:

1. Higher returns and better performance: Alternative investments often offer higher returns than traditional investments. When successful, private equity, venture capital, and hedge fund investments can offer considerable returns.
2. Lower volatility: With interest rates rising and the state of the economic landscape, many investors are turning to alternatives.
3. Portfolio diversification: A well-diversified portfolio reduces the risk of your portfolio and has a mix of stocks, bonds, and alternative investments.

There are many advantages when investing in alternatives, but they aren’t the right option for everyone. Investing goals and strategies vary significantly from person to person, so be sure to evaluate your options carefully.

Are alternative investments right for you?

They could be! For investors looking to diversify their portfolio with a high-performance investment outside the stock market, alternative investments are certainly worth looking at.

Your first stop should be at Hedgehog Investments. Our unique alternative investment model allows investors to become private money lenders and strengthen their portfolios with a lower-risk venture that provides excellent returns.

We’re on a mission to increase the accessibility of high-performing investments and allow our investors to build strategic wealth, without risking it all. Get in touch with our team today to learn more.

Disclaimer:

This material is intended for informational purposes only and should not be construed as legal or tax advice. Information here is not intended to replace the advice of your investment advisor or financial advisor. This information is not an offer or a solicitation to buy or sell securities. This information may have been compiled from third-party sources and is believed to be reliable. All investing involves risk, including the loss of principal.