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Alternative asset definition

An alternative asset is a type of investment that differs from the conventional categories of stocks, bonds, or cash.

 

What is an alternative asset?

Examples of alternative assets are precious metals, art, antiques, stamps with a collector’s value, real-estate investments, hedge funds and private equity.

Alternative assets differ from traditional assets in several ways. First, their degree of liquidity is relatively low. This is especially true for collectible assets where demand and supply are not easily determined. Secondly, the market for alternative assets has a lower degree of regulation and transparency. Thirdly, the price of these assets can be difficult to estimate due to their rarity or unknown demand, especially when they are traded outside of public markets. For this reason, the price or value of assets such as private equity and real estate is determined through appraisal models. Also, the value of these assets may not be correlated with the value of other assets. 

Alternative assets categories

Alternative assets generally fall into the following categories: certain types of investment funds, private equity, derivatives, collectibles, commodities, and real estate.

Assets in the collectibles category have a collector’s value, which may increase over time. For instance, because of their limited numbers certain series of cars have a collector’s value that increases over time. When a car is destroyed the value of the remaining cars also increases.

Commodities refer to assets such as precious metals and alternative energy sources.

The opportunity for investing in some of these alternative assets can be rather limited: hedge funds, private equity and venture capital are usually only available only to wealthy investors; real estate could also be a limited investing opportunity for small investors as it requires a large amount of capital. So, while many investors may not be able to access some alternative investments directly, they can gain exposure to these assets through some types of funds.

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