Alternative investments have garnered greater attention as interest rates continue to remain at historic lows. But with investors looking to earn greater returns, alternative investments like private equity are viewed as an encouraging option to invest their money.
Alternative investments are defined against the three traditional asset type-cash, stocks and bonds-and include an array of investment opportunities: Venture capital, hedge funds, derivatives, real estate, commodities, etc. High net worth individuals and institutions usually hold these investments, as they tend to be more illiquid than stock and bonds. With that said, returns on alternative investments have a low correlation with the performance of traditional asset classes, making them a potentially desirable investment for those who want to seek financial diversification.
The shifting attitude and perception of alternative investments-especially given the precarious state of the economy-is driven by a few factors. On the one hand, alternative investments are being used for portfolio diversification to the traditional asset classes. This sort of diversification is necessary to hedge against not only market volatility but decreasing consumer confidence, high personal debt, and of course, low interest rates.
The other issue affecting investments is high inflation. Individuals and institutions have traditionally invested in bonds-especially government bonds-to keep pace with inflation. Bonds were a safe way to grow your wealth while adopting a low risk financial profile. With higher interest rates, and backing from the government, bonds were an efficient way for entities like pension funds and insurance companies to grow the money they held. However, with low interest rates and high inflation-emerging globally-most bonds aren’t delivering the returns like they once had. And with consumer and market confidence still relatively weak, investing in equity is perceived as a risky option for most people.
While these issues make people apprehensive investing in public capital markets, they have made investing in alternative investments all that more attractive. This shift is supported by a number of recent observations: Increased involvement and growth by angel investors; reluctance of tech start-ups to go public; higher number of government pension funds investing in private equity; and recent figures coming out indicating private equity firms are sitting on a $1 trillion war chest.
Alternative investments can provide superior earnings for investors while mitigating risks from playing in the public stock market. Nevertheless, high barriers are still encountered for those trying to enter this market, with most private-equity firms requiring investors to have several million before they can invest-though some firms have recently begun to lower this number to $250,000 to attract more individuals.
Faced with these barriers, P2P Financial offers an easy and accessible service for accredited investors to directly invest in private companies and special situations. With the current state of the market, P2P offers high-quality investments that are extremely difficult to find for most investors. More importantly with low interest rates, high-inflation, and continued market volatility, it’s hard to gloss over alternative investments, as they may well become an important asset class in your investment portfolio.