When people hear alternative investment, one of the first things that spring to mind is that it is an investment that only large institutional investors have access to it or it is an investment that is way too complicated for average investors to understand. This is a common misunderstanding, and until recently, may have been almost true. However, with the recent introduction of new technology and regulation changes, access to this investment class has opened to a much broader audience. Real estate, venture capital, commodities, digital assets — these are all parts of alternative investment.
Generally speaking, alternative investments are asset classes that are not correlated to stocks, bonds, and mutual funds. These investment instruments are different from the traditional investments most people are familiar with. A report by PwC says that “alternative investments will surpass $21 trillion in assets by 2025, more than doubling in size in eight years and reaching 15% of global assets under management.”
Most investors don’t know that this type of investment can actually be more profitable than traditional ones. Here are some of the reasons why investors should venture into alternative investments.
Alternative investments are uncorrelated to the stock market
If you are an experienced investor, it is most likely that you already have experience in the stock market and had some big wins and significant losses. Anyone who follows their stock portfolio and has seen it drop knows that it can be painful to watch. One of the main reasons why most investors seek alternative investments is diversification. According to a recent survey by the iCapital network, diversification and attractive returns are the top two reasons investors venture in alternatives.
An investment that is not related to the stock market means that it does not change relative to the market’s upward and downward trends. Many investors think that they are diversifying their portfolio when they hold on to publicly-traded alternatives, only to realize that they are also volatile and don’t add much value to their portfolio.
However, many investors have also discovered other alternative investments, such as digital assets, that are not as volatile as traditional assets and can diversify their portfolios. This way, when the stock market plunges significantly, they have a hedge of protection, and not all of their investment portfolio will be affected. The stock market is popular for being unpredictable, even in a stable economy, and alternative assets can shield any portfolio from unpredictable swings in the public market.
The alternative asset market is emerging
According to a report by Prance Gold Holdings, “The digital asset market is currently at US$ 268 billion, with an all-time high of US$ 744 billion in 2018. Major drivers for market growth are the transparency of distributed ledger technology, high remittances in developing countries, high cost of cross-border remittance, fluctuations in monetary regulations, and growth in venture capital investments. Now, trading and investments also drive the growth of the market.”
Prance Gold Holdings is an alternative investment platform that helps drive the growth of the alternative asset market. By investing in platforms such as this, investors can increase the number of trades in the alternative markets, making it more stable than traditional ones. Alternative investments can also be more profitable, especially when used with a sustainable strategy like arbitrage.
According to the same report, “arbitrage is a form of trading that takes advantage of price discrepancies of the same digital asset from different exchanges. Traders can use an automated trading system as part of an arbitrage trading. Automated trading systems rely on algorithms to spot price differentials on different exchanges. It allows traders to jump on the arbitrage opportunity before it becomes common knowledge, and the market adjusts the inefficiencies.”
There are many attractive reasons why investors should venture into the alternative investment space. One of the most popular ones is that it offers an alternate way for investors to grow their portfolio without putting all their investments in one basket. Because of the growing alternative investment market, we can see more opportunities in alternatives.