Alternative Investments

What Is an Alternative Investment or Alternative Asset?

To appreciate how alternative assets are defined, you need to understand two related concepts known as asset classes and asset allocation.

Put simply, an asset class is a type of asset that has a certain set of similar characteristics; e.g., how it generates a return, the risks involved in owning or holding it, its correlation with other asset classes or economic forces such as interest rates.

Asset allocation refers to building a model or mapping out a general guideline as to the rough percentage of a portfolio an investor wants to have working in each asset class.

Traditionally, there are a handful of what you might call "core" asset classes that a reasonable person might consider adding to his or her investment portfolio. That is, if you were administering a balanced trust fund or hiring an asset management company or registered investment advisor to put together and maintain a diversified portfolio for you or your heirs, you would the portfolio to contain one or more of the following:

  • Cash and cash equivalents
  • Stocks
  • Bonds

Why does that matter? In its broadest sense, an alternative investment, or alternative asset, is any type of asset that does not fall into one of these categories. That is, an alternative investment is anything not made up of cash, stocks, or bonds.