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When referring to alternative investments you could be speaking to a number of possible investment opportunities. You may be referring to commodities, hedge funds, real estate, private equity, or perhaps venture capital. Basically alternative investments include investment products other than the more traditional investments such as stocks and bonds, money markets, or cash. Many investors go with investments of this nature for various reasons. Some investors may be looking to acquire less risk with the possibility for higher returns, reduced volatility, higher liquidity, and in some cases portfolio diversification. In today's article we will discuss three different investment options that fall under this category including hedge funds, commodities, and venture capital.
Hedge Funds are private investments funds that are typically open only to a limited group of professional or wealthy investors. Each fund has its own strategy, employed by its investment manager and the point of this fund is to offset potential losses in the principal markets by hedging their investments. Short selling is often a hedging strategy used among many others. They are loosely regulated alternative investments that allow hedge fund investing to be done "under the radar." Fees are based on performance and the funds under management, and the funds will usually have minimum investment periods.
Commodity trading is also known as futures trading. Commodities are known as anything for which there is a demand and its price is determined as function of its market as a whole. When trading commodities you don't actually buy or own anything, but you are speculating on the future direction of the price for the commodity you are trading. There is always a buyer and a seller however to buy or sell a commodity really signifies the direction in which you expect the future prices will take. Futures contracts are used by those participating in this type of trading.
Venture capital, like hedge funds, typically comes from wealthy individuals or institutional investors and it is pooled together by dedicated investment firms. Alternative investments of this nature are a type of private equity capital provided mostly to high potential, yet immature, growth companies in order to generate a return. These returns are generated through eventual realization events such as trade sales of the company or through and IPO. They are typically made as cash in exchange for shares in the invested company. Venture capitals are used a lot for newer companies that have a limited operating history and are too small to secure a bank loan, complete a debt offering, or are just too small to raise capital in the public markets.