What Are Alternative Assets?

Alternative assets, also known as alternative investments, are non-traditional asset classes that differ from traditional investments like stocks, bonds, and cash. These assets typically have low correlations with traditional financial markets and can serve as a means of diversification in an investment portfolio.

Alternative assets encompass a wide range of investments and can include:

Private Debt / Private Credit: Investments in non-publicly traded debt securities, including direct lending to businesses, distressed debt, mezzanine financing, and peer-to-peer (p2p) lending.

Private Equity: Investments in privately held companies or ventures that are not publicly traded. Private equity investments are typically illiquid and may involve venture capital, buyouts, equity crowdfunding (ECF) or direct investments in private companies.

Hedge Funds: These are investment funds that use various strategies to generate returns for their investors. Hedge funds can employ strategies such as long/short equity, event-driven, and macroeconomic strategies.

Commodities: Physical assets or contracts tied to the prices of physical assets, such as gold, oil, agricultural products, and metals. Investments in commodities can be used for diversification and as a hedge against inflation.

Real Estate: This includes physical properties such as residential and commercial real estate, as well as real estate investment trusts (REITs), which provide exposure to real estate without direct ownership.

Collectibles: Investments in tangible assets like art, antiques, rare coins, and fine wine. The value of collectibles can appreciate over time, but they are often illiquid and may require specialized knowledge.

Structured Products: Financial instruments created to meet specific investment objectives, such as collateralized debt obligations (CDOs) and structured notes.

Infrastructure Investments: Investments in essential infrastructure assets like toll roads, bridges, utilities, and airports. These often provide stable, long-term income streams.

Venture Capital: Investments in early-stage startups and emerging companies with high growth potential. Venture capital investments can be high risk but offer the potential for substantial returns.

Derivatives: Financial contracts whose value derives from an underlying asset, index, or interest rate. Derivatives include options, futures, and swaps.

Fine Art: Investing in fine art pieces, which can appreciate over time and provide aesthetic enjoyment in addition to potential financial returns.

Timberland: Investments in forests and timber-related assets, which can provide returns through timber harvesting and land appreciation.

Alternative assets can offer diversification benefits and the potential for uncorrelated returns with traditional financial markets. Adding alternatives to a traditional portfolio can curb volatility and enhance potential risk-adjusted returns. When J.P. Morgan ran the numbers, they found that adding a basket of alternative assets to a baseline 60/40 portfolio helped manage risk and improve returns. Shifting a 60/40 portfolio to 30% alternatives, 40% equities and 30% fixed income boosted annualized returns from 8.39% to 9.04% and reduced volatility from 9.66% to 7.97% during the period studied.1

However, investors should take note that alternative assets often come with unique risks, including illiquidity, complexity, and higher fees. Investors considering alternative assets should conduct thorough research, understand the associated risks, and consider consulting with financial professionals with expertise in these specific asset classes.

The SC website / link (https://www.sc.com.my/development/digital/digital-initiatives) contains a list of registered platforms that facilitate investing opportunities in alternative assets such as p2p, ECF, digital assets and other investing areas.