Alternative investments: what are they and how do they work?

Understand alternative investments

When it comes to investments, the first thing that comes to mind for most people are stocks, fixed income and traditional funds. But the financial universe is much broader than it seems, and that’s where alternative investments come in.

They are not the “bread and butter” of the market and can be good options for diversifying your portfolio and, in some cases, achieving more interesting returns.

But after all, what are these alternative investments? And how do they work in practice? That’s what we’re going to explain to you now, without any complications.

What Are Alternative Investments?

Alternative investments are basically all types of investments that don’t fall under traditional fixed income (like government bonds and savings accounts) or equities (like stocks and ETFs).

They include different types of assets and strategies, such as:

• Private equity funds;
• Hedge funds;
• Startup investments (venture capital);
• Cryptocurrencies;
• Commodities (like gold, silver, or oil);
• Real estate;
• Art, wine, collectibles, and even farmland.

These assets often have a different relationship with the traditional financial market.

That means, for example, in times of stock market crises, they don’t necessarily suffer the same impacts, which can be good news for those looking to protect their wealth.

How Do They Work in Practice?

Each type of alternative investment works in a different way. Here are a few examples to help clarify:

1. Private Equity

You invest in companies that haven’t gone public yet. The idea is to get in “before they become famous” and profit when the company grows or is sold.

Usually, these investments are made through specialized funds with professional management.

2. Venture Capital

Very similar to private equity, but focused on early-stage startups. It’s a high-risk, high-reward investment. The investor bets that the startup will grow fast and gain significant value.

3. Hedge Funds

These are funds that use more sophisticated strategies like leverage, derivatives, and short selling. The goal is to generate profit in different market conditions, even during downturns.

4. Cryptocurrencies

Bitcoin, Ethereum, and other digital currencies are a popular form of alternative investment. They’re volatile and still relatively unregulated but attract investors due to their potential for high returns (and the innovative technology behind them, like blockchain).

5. Real Estate

Buying property to rent out or investing in real estate investment funds (REITs or similar) is also considered an alternative investment. The profit comes from both the property’s appreciation and rental income.

What Are the Advantages?

Since many of these assets don’t follow the same patterns as the stock market, they help balance your portfolio during uncertain times.

Some alternative investments can generate impressive returns, especially over the long term. You can invest in sectors or companies that aren’t listed on the stock exchange, for example.

And the Risks?

Of course, like everything in the financial world, there are also risks involved, and they tend to be higher than in traditional investments. Here are some key points to consider:

• Lower Liquidity: These assets often take longer to sell or cash out.
• More Complexity: It’s not always easy to understand how each option works. Some require technical knowledge or professional support.
• Higher Risk of Loss: Precisely because they’re riskier, they can lead to losses if chosen poorly or if market conditions change.

Is It Worth Investing?

That depends on your investor profile and financial goals. Alternative investments aren’t recommended for beginners or for those looking for total safety.

But if you already have a solid base, understand the risks, and want to diversify, they can be an excellent addition to your portfolio.

It’s also worth noting that many of these investments are only available to qualified investors (those with higher income or assets), but that’s changing. Digital platforms and fintechs are making access easier for a broader audience.

Alternative investments are like the less obvious paths of the financial market, and precisely for that reason, they can offer great opportunities for those who want to diversify and go beyond the basics.

The tip is: study, understand each option carefully, start small, and, if possible, get professional advice. That way, you can include these alternatives in your strategy without losing control of your money.

Written by

Juliana Raquel