o3 BLOG | Investing

Alternative investments are assets or financial instruments that do not fall into traditional investment categories, such as stocks, bonds, and cash. Examples of alternative investments are private equity or venture capital, hedge funds, managed futures, art and antiques, and commodities, such as gold and other precious metals. 

For the last decade and a half, the alternative investments industry has grown in popularity and accessibility, owing mainly to the global economic downturn in 2008.

When the stock market crashed, many people who had previously relied heavily on traditional investments saw the value of their investments plummet, prompting many to look into alternative investments. Alternatives have a low correlation with traditional assets, which means they tend to trend in opposite directions. As a result, they are wise additions to investors’ portfolios seeking to diversify, spread risk, and increase returns. 

Markets took another heavy hit with the emergence of the COVID-19. 2022 marks two years into the pandemic, and with the threat of new variants and outbreak risks, many investors are shifting their focus to alternative investments. In this post, we take a closer look at examples of alternative investments, why investors consider gold the best alternative investment in 2022, and alternative ways to invest in gold.

5 Types of Alternative Investments:

1.) Hedge Funds

Hedge funds are investment funds that trade relatively liquid assets and use various investment strategies with the goal of earning a high return. To execute their strategy, hedge fund managers can specialize in multiple skills, including long-short equity, market neutral, volatility arbitrage, and quantitative investment strategies.

Some limitations come with hedge fund investing, allowing only institutional investors such as endowments, pension funds, mutual funds, and high-net-worth individuals to invest.

2.) Private Equity and Venture Capital

Private equity is a broad category that refers to capital investments made in private companies that are not listed and do not trade on a public exchange, such as the Toronto Stock Exchange. There are three main subsets to private equity, including:

• Venture capital is a type of financing that focuses on startup and early-stage businesses.
• Growth capital is financing that enables more mature businesses to expand or restructure.
• Buyouts are transactions in which a company purchases another company or one of its divisions outright.

The relationship between the investment firm and the company receiving capital is a critical aspect of private equity. Private equity firms frequently provide more than just capital to the companies in which they invest; they also offer benefits such as industry expertise, talent sourcing assistance, and mentorship to founders.

3.) Private Debt

Private debt refers to not bank-financed investments (e.g., a bank loan) or traded on an open market. The word “private” is important because it relates to the financial instrument rather than the borrower of the debt, as both public and private companies can borrow through private debt.

When a company requires additional capital to expand, private debt is leveraged. The companies that issue the capital are known as private debt funds, and they typically make money in two ways: interest payments and loan repayment.

4.) Real Estate

Real Estate investments come in a variety of forms. Land, timberland, and farmland, for example, are all considered real estate property. Real estate is the most common and the world’s largest asset class.

Aside from its size, real estate is a unique category because it has characteristics similar to bonds in the sense that property owners receive current cash flow from tenants paying rent. It is also similar to equity because the goal is to increase the asset’s long-term value (capital appreciation).

Valuation is a challenge in real estate investing, as it is in other real assets. Real estate valuation methods have specific advantages and disadvantages, including income capitalization, discounted cash flow, and comparable sales. It is critical to develop strong valuation skills and understand when and how to use various ways to become a successful real estate investor.

5.) Gold and other commodities

Commodities are tangible assets, primarily natural resources such as agricultural products, oil, natural gas, and precious metals and minerals. Commodities are regarded as an inflation hedge because they are not affected by public equity markets. Furthermore, the value of commodities rises and falls in response to supply and demand — higher demand for commodities results in higher prices and, as a result, higher investor profit.

Gold as an Alternative Investment in 2022

Many investors refer to physical gold as the best liquid asset, a tangible yet effective inflation hedge, and a long-term store of value. As a result, it is frequently a sought-after asset class and can rival certain stocks. Gold is an excellent diversifier because of its low correlation with other asset classes, particularly stocks. In the event of a financial downturn, gold can serve as a rescue asset.

Alternative Ways to Invest in Gold

There are several avenues for investors to gain exposure to gold. In addition to purchasing and holding physical gold such as coins or bars, you can invest in gold exchange-traded funds (ETFs) or indirectly through ETFs, options, or gold mining stocks.

A gold allocation of 5% to 10% is considered healthy for an individual’s portfolio. When it comes to investing in gold, it’s also critical to understand the factors that influence gold prices.

Because of the evolution of financial markets, a new generation of investors knows the potential of gold as more than just a physical asset. If you intend to invest in gold to diversify your portfolio in 2022, here are some alternative ways that allow more flexibility in terms of the investment amount, lower taxation, and better returns without losing its liquidity.

Gold ETFs 

Gold ETFs are the equivalent of purchasing physical gold without the inconvenience of storing it. Gold ETF prices often move in lockstep with gold prices.

Gold ETFs are available through indexes, and you can purchase them through a stockbroker or a security trading company in the same way that shares can. ETF share prices fluctuate throughout the day as the ETF is bought and sold, unlike mutual funds, which only trade once a day after the market closes. One ETF can hold a variety of investments, such as stocks, commodities, or bonds; some offer only Canadian holdings, while others are international. 

Gold Futures or Options

Trading futures or options contracts are a type of speculative investing. Futures and options are derivatives, meaning that their value depends entirely on the price of an underlying asset.

A futures contract is an agreement to buy or sell a security at a predetermined price on a specific date, regardless of market conditions. In the meantime, an options contract is an agreement that gives you the right to buy or sell a security if it reaches a specific price on or before a certain date.

To invest in futures or options, you must first open an account with an online broker that offers these products. Many online brokerages permit trading in these securities, but account holders may be required to sign additional forms acknowledging the risk of investing in these derivatives.

You can buy and sell options and futures directly through the platform once you’ve established a brokerage account to trade them. Most platforms charge a commission for all options and futures trades, which varies depending on the number of contracts purchased or sold.

People who invest in gold through options or futures contracts must keep track of their holdings to sell, roll over, or exercise their options before they expire with no value. Furthermore, options often include some leverage level—one reason new investors should heed caution when investing in this route.

Gold Mining Stocks

Another way to profit from rising gold prices is to own the mining companies that produce it.

Gold mining stocks are the best option for investors because they can profit from gold in two ways. For starters, as the price of gold rises, so will the miner’s profits. Second, the miner has the ability to increase output over time, resulting in a double whammy effect. Whether you are a seasoned investor or just starting, check out this article: Junior Mining Stocks — Potential for Massive Rewards. We cover everything you need to know about investing in gold mining companies and junior mining stocks.

To learn how to add long-term value to your portfolio using gold, contact our Investor Relations Team today!