What Are Alternative Investments? Types, Risks, and Benefits

Alternative investments are any financial assets that are not stocks, bonds, or cash. They can be worth considering if you want to diversify beyond the public markets, but the trade-off is that many alternatives are harder to value, more expensive to own, and less liquid than traditional investments.

While these assets were once mostly reserved for institutions and the ultra-wealthy, new platforms and regulatory changes have made them increasingly accessible to everyday U.S. consumers looking for low-risk ways to diversify their portfolios.

This guide breaks down the most common types of alternative assets, why investors use them, and the risks you should understand before moving money out of traditional markets.

Key Takeaways

• Broad Definition: Alternatives include everything from real estate and private equity to commodities and digital assets.
• Low Correlation: These assets often move independently of the stock market, providing a hedge during market downturns.
• Liquidity Concerns: Many alternatives require locking up your money for several years.
• Increased Accessibility: Retail investors can now access alternatives through crowdfunding and fractional ownership platforms.

How Do Alternative Investments Differ From Stocks?

They differ mainly in how they are traded, regulated, and priced day to day. Stocks and bonds are generally public assets, meaning they trade on exchanges like the NYSE and are highly regulated by the SEC.

Understanding how stocks work is the foundation for comparing them to private assets, which are often less liquid, so selling can take weeks, months, or longer.

Alternative investments are often private assets that do not trade on public exchanges, so their prices are not updated continuously. As NerdWallet explains, the lack of public trading can mean lower day-to-day volatility, but in practice it also makes it harder to sell quickly if you need cash.

What Are the Most Common Types of Alternative Assets?

The most common alternative investments for individual investors fall into a handful of buckets. What actually matters here is whether you understand how the asset makes money and how easily you can exit.

• Real Estate: Physical rental properties or Real Estate Investment Trusts (REITs).
• Private Equity and Venture Capital: Investing in companies that are not listed on a public stock exchange.
• Commodities: Physical goods like gold, oil, or agricultural products.
• Collectibles: High-value items such as fine art, vintage wine, or classic cars.
• Hedge Funds: Managed investment funds that may use short-selling and leverage.
• Private Credit: Lending money directly to businesses instead of buying corporate bonds.

Why Should You Consider Alternatives in a Diversified Portfolio?

You consider alternatives mainly for diversification, since they often do not move in lockstep with the stock market. Because many have a low correlation to public equities, they may hold steadier or even rise when the S&P 500 is falling, which can smooth your portfolio’s results over time.

Some alternatives can also serve as an inflation hedge. For example, when inflation rises, physical assets like real estate or gold may increase in value, while traditional bonds can struggle when interest rates rise.

Are You an Accredited or Non-Accredited Investor?

You need to know whether you qualify as an accredited investor, because it determines which alternative investments you can legally access. According to SEC guidelines, an individual is generally considered accredited if they have a net worth over $1 million or annual income exceeding $200,000 for the last two years.

Access is expanding for non-accredited investors through retail-focused platforms. These can let you buy fractional shares of assets like commercial real estate or art with relatively small minimums, sometimes around $100.

The mistake most people make is assuming “available to retail” means “same deal as institutions,” since these versions can come with different fees, liquidity rules, and return profiles.

What Are the Primary Risks and Liquidity Challenges?

The primary risks are illiquidity, harder pricing, higher fees, and less transparency than you typically get with public markets. If you are used to seeing real-time prices and clicking “sell,” alternatives can feel like a different world.

• Lack of Liquidity: You often cannot sell quickly, and some investments require a 5 to 10-year commitment.
• Valuation Difficulties: Since these assets do not trade daily, it can be hard to know what they are worth at any given moment.
• Higher Fees: Alternatives may include management fees and performance fees, such as the “2 and 20” model common in hedge funds.
• Regulatory Oversight: Many alternative assets have fewer reporting requirements than public companies, which can mean less transparency for you as an investor.

How Can You Start Investing with Low Capital?

You can start with more liquid, lower-minimum options that give you exposure without tying up your money for years. The trade-off is that some of these options behave more like traditional public-market investments, even if the underlying exposure is “alternative.”

• Publicly Traded REITs: Trade like stocks while providing real estate exposure.
• Crowdfunding Platforms: Sites like Fundrise or Yieldstreet pool money to fund private projects.
• Gold and Silver ETFs: Provide exposure without needing to find the best place to buy gold online or store physical metals at home.
• Fractional Art Platforms: Services like Masterworks let you buy shares in a painting by a well-known artist.

Many of these liquid alternatives, such as REITs, Gold ETFs, and even certain cryptocurrencies, can be accessed through major brokerage platforms.

As Bankrate notes, choosing between a REIT and a physical rental property often comes down to how hands-on you want to be and how much capital you have.

What Are the Tax Implications for Alternative Assets?

Alternative investments often create more complicated tax paperwork than the standard 1099-B you receive for stock sales. Many alternatives, especially private equity or real estate syndications, are structured as partnerships, which may mean you receive a Schedule K-1 instead of a 1099.

K-1s can arrive late, sometimes in March or April, which may push you to file for an extension. Some alternatives may also generate Unrelated Business Taxable Income (UBTI), which can create tax liabilities even if the investment is held within an IRA.

Always consult a tax professional before making a large allocation to private alternatives.

The Bottom Line

Alternative investments can help reduce portfolio volatility and add exposure beyond public stocks and bonds. The catch is that they often demand more due diligence and may require leaving your money untouched for years.

If you are interested in alternatives, start small with more liquid options like REITs or gold ETFs before committing to complex private placements.

Read More

• Real Estate Crowdfunding – How It Works
• Real Estate Investing for Beginners: How to Get Started
• Bonds 101: How Do They Work And What Investors Should Know?
• How to Invest in ETFs: Build a Diversified Portfolio