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An investment that is not one of the three traditional asset types (stocks, bonds and
cash). Most alternative investment assets are held by institutional investors or
accredited, high-net-worth individuals because of their complex nature, limited
regulations and relative lack of liquidity. Alternative investments include hedge
funds, managed futures, real estate, commodities and derivatives contracts.
Alternative assets are generally viewed as less liquid than regular assets. For example, most
artwork, sports cards, and stamps gain the majority of their value over a long period of time.
Other alternative assets, such as investments in infrastructure-related projects, may take decades
to gain significant value. Therefore, investors considering alternative assets are generally
investing far into the future.[2]
Advantages
The main advantage of alternative assets is that they help diversify an investor's portfolio. Since
they are non-traditional investments, they do not tend to move in the direction of the stock
market and may, therefore, help a portfolio sustain market volatility. Also, due to lower liquidity,
alternative assets are often mispriced and so offer opportunities for arbitrage.
Disadvantages
Due to its non-traditional nature, alternative assets are more difficult to add to a portfolio.
Therefore, banks may charge an additional fee for holding the asset. Furthermore, depending on
the returns realized from the asset, additional tax forms may have to be filed. Its lack of liquidity
is also seen as a major disadvantage since liquidating, as well as properly valuing, the asset may
take some time.