Defining Alternative Investments

At a recent conference, I was reminded that definitions in the “alternative investment” space can be ambiguous and sponsors/managers are more than willing to slap the “alternative” label on nearly any investment product for marketing purposes.

One of the most helpful lessons I learned about “alternative” investments was that there is no such thing as an alternative asset. Every investable asset is either equity or debt. Let’s look at some common assets:

Stocks = equity in a company
Bonds = debt owed by a company
Real Estate = equity in a land or building
Mortgages = debt owed by a real estate owner
Commodities = equity in a physical asset

*Derivatives could technically be classified as a third category, but they will “derive” their value from equity or debt and can behave like either depending on the structure.

So the most important thing to know about alternative investments is that there’s no such thing. “Alternative” describes an asset’s place in a classification system, but not an inherent attribute. Hybrid assets, structured products, hedge funds, private equities, infrastructure, and so on can all be disaggregated into equity and debt. So before investing in an “alternative” investment, throw out the alternative moniker and understand what exactly the investment is and how it will behave. This simplified framework has been invaluable to me and I hope it is for you too!