Alternative assets are those that do not fall into the categories of traditional physical assets (real estate, physical gold) or traditional financial assets (fixed deposits, equity shares, equity and debt mutual funds). With a twist, alternative assets are also a part of some asset classes. There are a few other asset classifications, however they are not really useful because they are quite specialised (like art). Because of the discussion and controversy surrounding cryptocurrency assets, it is also acceptable to exclude them.
Debt-based Alternative Assets
The following categories of alternative assets exist: debt (high yield bonds, market-linked debentures, green bonds, invoice discounting, peer-to-peer lending, pass through certificates, invoice discounting), equity (private equity, unlisted equity, venture capital), real estate (real estate investment trusts, or Reits, fractional real estate, infrastructure investment trusts, or InvITs), etc.
Limited to Institutional and UHNIs
Due to the huge ticket sizes, only institutional and extremely high net worth investors (UHNI) were able to purchase these assets until recently. Because of the reduced ticket sizes offered, the advancement of technology has now made these products available to all investors. Despite being tradable in theory, the majority of alternative assets lack a vibrant market. Because of this, it is challenging to sell these assets at a reasonable price when money is needed.
Higher Potential Returns
Returns on alternative assets may be higher than those on standard assets. These bigger gains, of course, come with a higher risk. Generally speaking, alternative assets and traditional assets have a lesser correlation. For example, compared to typical debt instruments, high-yield bonds are less vulnerable to fluctuations in interest rates.
Steady but Limited Returns of Fixed Deposits
Although fixed deposits offer steady and predictable earnings, particularly after taxes, they cannot outpace inflation. Even after taxes, high yield bonds outperform inflation and have the potential to produce yields between 10 and 12 percent.
Access to Real Estate with Fractional Ownership
Alternative asset offers have become more “sachetized” because to technology and financial platforms. Investing in a variety of assets at extremely tiny ticket sizes allows investors to diversify their holdings among a greater number of alternatives. Investing in real estate at a significantly lower ticket size is possible with options like fractional real estate and Reits. Similarly, with as little as ₹10,000, one can invest in high return corporate bonds.
Risks Associated with Alternative Assets
Alternative assets are not without risk, including credit, liquidity, and market hazards. Alternative assets are not impervious to volatility in the market. Reits and InvITs’ returns could be impacted by a downturn in the real estate market. In a similar vein, unlisted and private equity assets will be impacted by a weak equity market. This risk can be decreased by diversifying your holdings among both traditional and nontraditional assets.
Understanding Credit Risk in Alternative Assets
The danger that the issuer won’t be able to pay the principle and interest on time is known as credit risk. An investor has to undertake extensive due research in order to reduce this risk. Investors might use solely investment grade (credit rated between AAA and BBB-) and secured bonds as a screening criterion when making investments in high yield bonds.
Evaluating Liquidity in Alternative Assets
As was already said, when making an investment in alternative assets, liquidity should be taken into serious account. Investors need to ensure that the liquidity requirements align with the instrument’s maturity. As an alternative, they can invest through platforms that offer liquidity, but at a price. It should be noted that different kinds of alternative assets have varying risk profiles. It is usually advisable to start cautiously and gain familiarity with the asset class before making significant investments, just like with anything new.
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