The World of Alternative Investment

NEW YORK (TheStreet) --Investors don't like the stock market the way they used to.

Retail investor participation rates in equities markets are low and have been for years. Who can blame them? Competing with high frequency trading isn't easy.

Fortunately, there is a world alternative investment to consider beyond equities, suitable for a broad range of capital levels and risk appetites. Forward-looking university endowment funds like those of Harvard and Yale paved the way, and in recent years smart money in general has taken notice of the alternative investment model.

In this article, the first in a series, we'll introduce the reader to several classes of alternative investment:

1. Real Estate:The most familiar way to profit from real estate may be the fix-and-flip, adding value by improving run-down properties. This type of investment can yield handsome returns, but it's a complex and potentially costly venture for those not intimately familiar with the process.

A similar idea is to invest in REO, or real estate-owned, properties, either directly or through a fund. In principle the approach can pay handsomely, as banks often look to get rid of distressed properties at a significant discount.

In practice, it can be a gamble -- properties are sold as-is, and an inexperienced buyer (or poorly managed fund) can easily fall victim to buying a property with expensive unforeseen issues.

Yet another direct investment option is crowdfunding. Sites like fundrise.com and realtymogul.com offer smaller investors opportunities to participate in real estate projects in their communities to turn a profit.

For those not excited to get their hands dirty, there are publicly traded alternatives. One option is to buy and hold broad market REITs such as Vanguard (VNQ) . There are also specialized REITs that can be used to play on specific market events, for example buying Healthcare Realty (HR) or Healthcare Trust of America (HTA) might be part of a bet on the market consequences of Obamacare.

2. Farmland: We made the case in a previous article that direct farmland investment may offer an attractive return profile for those willing to deal with the assets' inherent complexities. There are three ways to invest directly.

The first is cash renting -- leasing out purchased land directly to farmers at a fixed agreed-upon annual rate, with the landlord holding no interest in the farm's output. This type of rental yield tends to be far more stable than its real estate analog, since the nature of the business is such that farmers are typically just as interested as the landlord in locking in and keeping to the terms of a lease.

The second is custom farming. As with cash renting, the land owner cedes the responsibility of operating the farm to another party. Unlike cash renting, the landlord compensates the farmer for operating the farm, but keeps most of the proceeds of the farm's output. The risks involved are higher than cash renting but the payoff can be handsome, as rising grain prices have demonstrated in recent years.

A third option, optimal for investors looking to benefit from direct ownership but not prepared to get involved in agricultural decision-making, is to invest in a fund that does some combination of cash rent and custom farming on a geographically diversified portfolio of farmland.

For those interested in equities, there are the usual suspects: Companies involved directly in land investment like Adecoagro (AGRO) and Cresud (CRESY) , large farmland servicers like Deere & Co. (DE) and Monsanto (MON) and financials like Farmer Mac (AGM) .

3. Timberland: Like farmland, timberland is a highly desirable asset class with historically solid returns and low correlations with other major asset classes. While investing in timberland directly may be too ambitious for most investors, investing in timber producers is a good proxy.

Timber producers and processors do particularly well in the same kind of market conditions as home builders but are generally better off because inventory holding costs are low, and companies have the option to defer log harvesting as necessary.

Timber ETFs like the aptly-named WOOD (iShares S&P Global Timber & Forestry Index) and CUT (Guggenheim Timber) are an obvious way to invest in the timber sector. Their returns, however, are generally inferior to individual REITs like Plum Creek (PCL) , Potlatch (PCH) , Rayonier (RYN) , and Weyerhaeuser (WY) .

In articles to follow we'll talk about other types of investment including gold bullion and related assets, royalty funds, private placement, angel investment, direct startup involvement, and some others. We'll also compare and contrast the risks and rewards of these investments, and give readers a peek into the world of professionals who operate funds that focus on alternative investments.

At the time of publication, the author held no position in any of the stocks mentioned

This article was written by independent contributors, separate from TheStreet's regular news coverage.

Victor German: Victor has a background in math and computer science, and for the past twelve years has been an independent investor and proprietary trader. Victor specializes in fundamental and statistical analysis of event-driven and special situation strategies. As a trader, Victor has extensive experience in the analysis of events affecting commodities markets, including oil, gold, and agricultural commodities.

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