Alternative Investments

An alternative investment is an investment product other than traditional investments such as stocks, bonds or cash. This broad definition makes it impossible to list all alternative strategies, but the most important areas are real estate, private equity, venture capital, commodities, and hedged or absolute return strategies. Wine, art and antiques or any store of value, might also be considered as an alternative investment.

Private equity is investment into an operating company that isn’t publicly listed on the Stock Exchange. It may also include acquiring an operating company. Often this will include buying out a majority share of an existing company. These companies would ordinarily be well established and have a mature revenue stream.

A venture capital investment on the other hand, is when an entity (person or company) invests in an immature business that has potential. This kind of investment is obviously more risky than a private equity investment, but the returns can be significantly higher.

Commodities are materials that are in demand and are supplied across the markets without differentiation. That is to say, no matter where it comes from, it is the same thing. Examples are gold, platinum and other minerals, oil, coal and other fossil fuels and foodstuffs such as coffee, soybeans, wheat and corn. Commodities are generally bought on the stock market.

Hedge funds are usually high risk, high reward investments. The exception is with mutual funds as investors are not allowed to invest aggressively. Wikipedia explains hedging quite well with this example:

A stock trader believes that the stock price of Company A will rise over the next month, due to the company's new and efficient method of producing widgets. He wants to buy Company A shares to profit from their expected price increase. But Company A is part of the highly volatile widget industry. If the trader simply bought the shares based on his belief that the Company A shares were underpriced, the trade would be a speculation.

Since the trader is interested in the company, rather than the industry, he wants to hedge out the industry risk by short selling an equal value (number of shares × price) of the shares of Company A's direct competitor, Company B. If the trader was able to short sell an asset whose price had a mathematically defined relation with Company A's stock price (for example a call option on Company A shares) the trade might be essentially riskless and be called an arbitrage. But since some risk remains in the trade, it is said to be "hedged."