NEW YORK (TheStreet) -- Your choice of investment opportunities is largely restricted. Outside the familiar world of stocks, bonds, exchange-traded funds and other pre-packaged products, there is a whole universe of alternative investment vehicles that you should be aware of.
Alternative investments include venture capital, private equity, hedge funds, real estate investment trusts, commodities as well as real assets such as precious metals, rare coins, wine, and art. These assets usually perform with low correlation to stocks and bonds, may be difficult to value, and are generally more illiquid than traditional investments. (Liquid alternatives are an asset class that has developed in the last few years and includes ETFs and mutual funds that are traded publicly and managed to mimic the performance of an alternative asset class or strategy. For the purposes of this article, we do not include liquid alternatives in our definition of alternative investments.)
With some exceptions, only accredited investors are able to invest directly in the assets described above. This restriction exists because many fund managers rely on private placement registration exemptions that limit their investor base to sophisticated investors. These investments are growing in popularity as institutional investors including pension and endowment funds are increasingly allocating money to alternative investments as they realize the long-term benefits of this asset class.
The Yale endowment model is a case study on the benefits of hedge fund and private equity allocation. The Yale allocation to private equity is 33% of its $23.9 billion endowment fund, representing a significantly larger allocation than other educational institutions. The Yale endowment generated 20.2% in returns in fiscal 2014, far outpacing most endowments, and has gained 11% per year for the past 10 years.
Regulations limiting many kinds of alternative investments to accredited investors are meant to be both a sophistication test as well as a protective measure. Legislation hasn't been finalized to open up these alternative investments to the retail market yet. The below list is meant to be a snapshot of the different opportunities that exist in a huge and increasingly complex private capital marketplace.
With the proliferation of technology, investors can directly access and invest in alternative investment opportunities (for instance, using a platform such as DarcMatter, the company of which I am CEO). It is recommended that investors consult a trusted financial advisor on what investments fit appropriately within a given portfolio and risk tolerance. Investors should understand the investment strategy of the fund and be comfortable with its risk profile. Additionally, reviewing the investment professional's background and reputation is essential. Although the Securities and Exchange Commission does not regulate certain private investments, many managers are registered as investment advisers with the SEC or state securities commission. By accessing the SEC's Investment Adviser Public Disclosure Web site or North American Securities Administration Association Web site, investors can review the information about the adviser's fund.
While many of these types of investments aren't yet available to retail investors, many of them are. Here are seven common types of alternative investments:
Blackstone Group is one of the world's largest private-equity firms.
1. Private equity. There are more private companies than public companies, and many of them take on investor capital. Private equity is a broad term encompassing the entire investment spectrum of the private capital markets, and different private equity firms specialize in multiple investment strategies. Private equity firms typically raise funds and take capital from both non-institutional and institutional investors. The funds will then be used to place investments in promising private companies. The capital is returned to investors upon an exit event such as an IPO or acquisition after the firm takes its management and performance fee. As mentioned, private equity is a general classification that includes the investment in start-ups, venture capital, and financing throughout phases of a company's growth.