Alternative Assets - A Primer

Alternative assets have been gaining popularity in recent years as a way for investors to diversify their portfolios and achieve higher returns. Alternative assets are any investment that is not a traditional stock, bond, or cash. This asset class includes venture capital, private equity, real estate, hedge funds, and more.

Venture capital is an alternative asset that involves investing in early-stage companies with high growth potential. These companies are typically in the technology, biotech, or consumer goods sectors and have the potential to become significant players in their industries. Venture capital firms provide funding, strategic guidance, and mentorship to these companies in exchange for equity ownership.

Venture capital has been a critical driver of innovation and growth in the technology sector, with companies such as Google, Facebook, and Uber being among the most successful venture-backed companies. Venture capital firms typically focus on high-growth companies that have the potential to become unicorns or companies valued at over $1 billion.

One of the main advantages of venture capital is the potential for high returns. According to a study by Cambridge Associates, the average annual return for venture capital funds between 1984 and 2018 was 14.4%. This level is significantly higher than the average annual return for the S&P 500, which was 9.8% over the same period.

However, venture capital also comes with high risk. Most venture-backed companies do not achieve the expected level of success, and many fail completely. For this reason, venture capital should only be considered as a small part of a diversified investment portfolio.

Another advantage of alternative assets is that they often provide a level of diversification that traditional investments cannot. For example, real estate investments can provide diversification from the stock market, and hedge funds can provide diversification from traditional bonds. This method of diversification can reduce overall portfolio risk and increase the potential for returns.

In recent years, we have seen an increase in institutional investors, such as pension funds and endowments, investing in alternative assets. This increased appetite is partly due to the low-interest rate environment, which has made it difficult for traditional investments to provide the returns that investors are looking for.

However, alternative assets have their challenges. They can be illiquid because investors may find it difficult to sell the investment quickly. They also often require a high level of expertise and due diligence to understand and evaluate.

It is essential for investors to understand the potential benefits and drawbacks of alternative assets and to conduct proper due diligence before making any investments. As an investor, diversifying your portfolio with alternative assets can be a great way to increase potential returns while managing risk. Working with experienced venture capital firms and having a long-term investment horizon is paramount. With proper research and due diligence, alternative assets can be valuable to any investment portfolio.

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