This article provides an overview of alternative investments, covering categories such as collectibles, commodities, private equity, hedge funds, real estate, and timberland. For each type of alternative investment, we explore the potential benefits, and the potential risks.
Collectibles (Art, Wine, Antiques, Watches, Rare Cars)
Collectibles are tangible items with value driven by rarity, demand, and origin. These can range from fine art and vintage cars to rare wines and luxury watches.
Pros:
• Potential for significant appreciation
• Enjoyable to own and display
• Limited supply can enhance value
Cons:
• Highly illiquid: it can be challenging to find the right buyer if you wish to sell, in contrast to stocks which are highly liquid and can be sold to other buyers quickly
• Difficult to value accurately
• Requires expertise or access to trusted dealers
Commodities
Commodities include physical materials such as gold, silver, oil, and agricultural products. Investors can access commodities through futures contracts, Exchange Traded Funds (ETFs), or by owning the physical asset. In England, physical gold can be held in the form of Gold Sovereigns which are coins composed of 90%+ pure Gold and are exempt from Capital Gains Tax in the country.
Pros:
• Historically an effective hedge against inflation
• A harbour in the storm: in times of political instability or economic downturns, investors often flock to gold
• Global demand can drive long-term growth
Cons:
• Highly volatile in the short-term: gold prices can swing significantly on global markets
• Storage: physical gold requires safekeeping and sometimes insurance
• No dividends: gold doesn’t produce income like stocks or bonds
Private Equity
Private equity involves investing directly in private companies, either through venture capital (start-ups) or buyouts of established businesses. Most companies are not publicly traded so private equity gives investors access to a larger universe of companies. In the United States for example, there are roughly 30 million private businesses, but only about 4,000–5,000 are publicly traded on exchanges like the New York Stock Exchange or NASDAQ.
Pros:
• Potential for high returns
• Access to early-stage or high-growth companies
• Low correlation with public markets and therefore not subject to short-term price swings like stocks.
Cons:
• High minimum investments
• Illiquid and often requires a multi-year commitment
• Less regulatory oversight and transparency
Hedge Funds
Hedge funds are investment funds that pool money from multiple investors similar to mutual funds. However, the key difference between hedge funds and mutual funds is that hedge funds are not restricted in the types of investments they can make like mutual funds are. Mutual funds are restricted to stocks and bonds, but hedge funds are free to investing in anything. Typical examples include interest rate swaps, commodities such as oil and gold (often via futures contracts), and can even include profiting from geopolitical events using currencies (FOREX).
Hedge funds are designed to provide returns regardless of market conditions, though they are often complex and expensive.
Pros:
• Potential for significant returns
• Diversification through advanced strategies
• Professional management
Cons:
• High fees (often “2 and 20”: 2% management, 20% performance)
• Less transparency
• Usually only available to accredited investors
Real Estate
Real estate remains one of the most popular alternative investments. Whether it’s residential rental properties, commercial buildings, or land itself, real estate provides both income potential and long-term appreciation. Investors can also access the market through Real Estate Investment Trusts (REITs), which offer exposure without hands-on management.
Pros:
• Income potential: rental properties can generate a relatively steady cash flow
• A tangible asset: it’s a physical asset you can see and use, unlike many financial investments
• Historically a good way to protect against inflation: rents and property values often rise with inflation
Cons:
• High up-front cost
• Can require property management or oversight
• Market can be illiquid and cyclical
Timberland
The purchase and management of forested land for profit has been growing in popularity among both institutional and individual investors in recent years. Once considered a niche asset class dominated by paper and lumber companies, timberland is now recognized as a strategic way to diversify portfolios, generate long-term returns, and hedge against inflation. The World Bank projects global timber demand could quadruple by 2050 driven by population growth, urbanization, and housing needs. This combined with its potential as an element in net-zero strategies have contributed to timberland’s growing appeal. It is now seen by many investors as a compelling alternative to more traditional real-estate and commodity investments.
Pros:
• Tangible asset with real-world intrinsic value
• Potential for multiple income streams: revenue from timber sales, carbon credits, or land appreciation
• Historically low correlation with other markets such as stocks and bonds
Cons:
• High up-front costs: buying quality timberland requires substantial initial capital
• Exposure to environmental risks: storms and wildfires can damage assets
• Illiquidity: selling large tracts of land can take months or years