Alternative investments

Also called Alternatives, Alts

Investments outside ordinary stocks, bonds and cash, such as private equity, hedge funds, private credit, commodities and collectibles.

What it means

Alternatives cover a wide range: private equity (ownership in companies not traded on an exchange), hedge funds (pooled funds using strategies such as short selling and leverage), private credit (loans made outside public bond markets), commodities like gold or oil, and collectibles such as art, wine or coins. Some are offered only to accredited investors, while others are packaged in funds sold to the public.

Supporters say alternatives can diversify a portfolio or offer returns not tied to public markets. The tradeoffs are real: many are illiquid, with money locked up for years; fees are often high, commonly including a performance fee; disclosure is more limited than for public securities; and reported values may be estimates that hide true swings.

Example

Suppose a fund charges 2% a year plus 20% of profits. In a simplified illustration, on $100,000 that earns $10,000 before fees, the investor pays $2,000 plus $2,000, keeping a $6,000 gain, or 6% instead of 10%.

How it’s used

Seeking diversification beyond public stocks and bonds
Investing in private companies or private loans
Holding physical assets or commodities as an inflation hedge

Strengths and weaknesses

Strengths

May behave differently from public stocks and bonds
Access to private markets and specialized strategies
Some, like commodities, may respond to inflation differently

Weaknesses

Often illiquid, with lockups or limited ways to sell
High fees, including performance fees
Limited disclosure and harder-to-verify valuations

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.