An alternative investment is an investment

Investment

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

 product other than the traditional investments of stock

Stock

The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

s, bonds

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

, cash, or property. The term is a relatively loose one and includes tangible assets

Tangible investment

A tangible investment is something physical that you can touch. It is an investment in a tangible, hard or real asset or personal property. This contrasts with financial investments such as stocks, bonds, and other financial instruments....

 such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity

Private equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

, hedge funds, venture capital

Venture capital

Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

, film production and financial derivatives

Derivative (finance)

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

.

Research

There is a wide variety of literature on alternative investments; however, this term has been used broadly and can also be used to refer to financial alternatives such as derivatives or other alternatives such as energy. It is difficult to find research on the investment characteristics of tangible alternatives such as art or wine due primarily to a lack of good quality data. The Goizueta Business School

Goizueta Business School

Goizueta Business School is a private business school of Emory University located in Atlanta, Georgia, USA. It is named after Roberto Goizueta, a former president of The Coca-Cola Company.-Academics:...

 at Emory University

Emory University

Emory University is a private research university in metropolitan Atlanta, located in the Druid Hills section of unincorporated DeKalb County, Georgia, United States. The university was founded as Emory College in 1836 in Oxford, Georgia by a small group of Methodists and was named in honor of...

 has established the Emory Center for Alternative Investments

Emory Center for Alternative Investments

The Emory Center for Alternative Investments is a part of the Goizueta Business School at Emory University. The Center seeks to provide independent research to the Alternative Investments Industry through papers, conferences, and education...

 to provide research and a forum for discussion regarding private equity, hedge fund, and venture capital investments.

Investors

The Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, based on 2002 data, showed high net worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007, this had reduced to 9%. No recommendations were made in either report about the amount of money investors should place in alternative investments.

Characteristics

Alternative investments are sometimes used as a tool to reduce overall investment risk through diversification

Diversification (finance)

In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of...

.

Some of the characteristics of alternative investments may include:

• Low correlation
  Correlation
  In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....
  
  with traditional financial investments such as stocks and shares
• Alternative investments may be relatively illiquid
• It may be difficult to determine the current market value of the asset
• There may be limited historical risk and return data
• A high degree of investment analysis may be required before buying
• Costs of purchase and sale may be relatively high

Further reading

• Financial Instruments: Equities, Debt, Derivatives and Alternative Investments by David M. Weiss, Portfolio, 2009. ISBN 1-59184-227-1
• How To Invest In Stamps And Coins, Quick Easy Guides, 2008. ISBN 1-60620-661-3
• Portfolio Diversification benefits of Investing in Stamps by Chris Veld, University of Stirling. (Incomplete first draft)