Alternative Investments Defined

Since "alternative investments" is a specialization of ours, it would probably be helpful to define "alternatives." It’s in quotes, because the term is ill-defined. The first thing to understand is 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 us and we hope it is to you too.