This page discusses accessibility of alternative investments to smaller investors and recent developments in the area.
Alternative Assets Are Not Available to Everybody
Alternative investments are very diverse. You can choose from various styles of hedge funds, private equity funds, real estate, commodity investing vehicles, or even more exotic assets like a tropical forest or a highway bridge.
Nevertheless, if you only have a few thousand dollars to invest, the scale of alternative investment choices will be much narrower for you. There are two main reasons:
- Risk management.
- Legal restrictions.
Risk Management and Minimum Investment Limits
Some alternative assets require a big initial investment. You need at least tens of thousands of dollars to buy property directly. Hedge funds or private equity funds often have official minimum initial investment limits (e.g. one million dollars). Even when you have such amount to invest, it wouldn't be wise to put all eggs in one basket – for a portfolio of eight such hedge funds, you need at least 8 million in cash.
Legal Restrictions and Qualified Investors
Alternative investments are not unregulated (as some people might think). Hedge funds or private equity funds are subject to various rules and restrictions. They can only market and sell investments to qualified or sophisticated investors. Being sophisticated is mostly defined as having net worth exceeding a specified amount (e.g. a million dollars). However we might question this simplification, the law is always right.
Everybody Can Invest in Commodities
As one exception from the restricted accessibility of alternative assets, commodity investments are available to anybody. Exposure to commodities is easy to build using various types of instruments:
- Commodity futures.
- Shares in mining companies ("pure play" stock investments).
They all have one thing in common: they all trade publicly on exchanges and some of them are fairly liquid.
For example, corn futures are among the oldest and most heavily traded futures contracts. ETFs on oil (USO) or gold (GLD) are among the most liquid exchange traded funds.
Commodity investing is extremely easy (meaning easy to do, not necessarily profitably). It also seems to be extremely heavily promoted and popular in the last years (only time will show to what extent the commodity boom is justified by the alarming macroeconomic and social developments).
Making Alternative Investments Accessible to Small Investors
The trend in the last years has been towards making the other alternative asset classes accessible to retail investors as well. Financial companies, motivated by additional profits, have come up with solutions to enable the small investor on the alternative board too.
For instance, there are funds of hedge funds which give you exposure to multiple hedge funds with as little as USD 10,000. Or you can invest in real estate indirectly via publicly traded REITs (real estate investment trusts).
The trend of alternative investments becoming more widely available is one of the examples where the often criticized Wall Street's greed is useful to the small investor. If you don't have millions but really want to invest in hedge funds or private equity, there are ways.