Characteristics of Alternative Investments

• Alternative investments often involve a significant degree of risk.stock market analysis screenshot image by .shock from Fotolia.com
  
  Alternative investments refer to investment products other than the traditional investments in stocks, bonds, mutual funds, or real estate. Alternative investments include investments in tangible assets such as stamps, art, antiques, wine, or coins, as well as financial assets like exchange traded funds, hedge funds, and private equity.
  
  Alternative assets are considered to be more risky than traditional investments. However, they often offer higher rates of return as well.
  
  

Uncorrelated with Traditional Investments

• One of the primary reasons why investors put their money in alternative investments is because of the desire on the part of the investors to diversify their portfolios. Alternative investments do not usually rise and fall in sympathy with the Dow Jones Industrial Average, as most traditional investments do.
  
  

Lower Liquidity

• Another characteristic of alternative investments is that their liquidity is often much lower than that of traditional investment products. While the volume of stocks traded on major exchanges allow anybody pretty much at any time to sell his shares, it can take days, weeks or months to find a willing buyer for, say, an expensive painting.
  
  

Potentially Higher Rewards

• Alternative investments compensate for the higher risks of investing in them with potentially higher returns. Private equity funds and hedge funds not infrequently deliver annual returns in excess of 30%, though these high returns are notoriously volatile. Art, stamps, and coins can also greatly rise in value.