Alternative Asset Classes: Going Beyond the Basics

Because they typically are not highly correlated with stocks and bonds, so-called alternative assets can be used to try to balance the risks and rewards of such traditional investments as stocks and bonds. Though they are not suitable for all investors, alternative assets can increase the diversification of a traditional portfolio. If investing in alternative asset classes through a mutual fund, obtain and read the prospectus before investing.

Type of asset What it is Special considerations Hedge funds Private investment vehicles that use a variety of complex investing strategies not typically available to mutual funds. Open only to accredited investors, hedge funds are considered illiquid.
A fund of hedge funds may have lower minimums but multiple layers of fees. Private equity and venture capital Private ownership of a company or companies. Such investments are not traded or listed on a public exchange. Often requires a relatively large investment by qualified investors and a long-term focus because of limited liquidity. Real estate Property that may be owned directly, as either buildings or land, or through a real estate investment trust, mutual fund, or exchange-traded fund. If owned directly, real estate may not be easy to sell when you want to. Land and buildings are generally subject to annual property taxes, changes in zoning laws, and other factors. Natural resources Limited partnerships that own natural resources such as timber, oil and gas, and provide income from the resources produced. Partnerships may qualify for special tax treatment. Some resources may be depleted over time. Though some are publicly traded, LPs may be illiquid and may be available only to qualified investors. Precious metals Primarily gold, silver, and platinum. Gold in particular has traditionally been viewed as an alternative currency and inflation hedge. Depending on whether you hold bullion, coins, or securities, you may have storage and insurance concerns. Can also be highly volatile. Commodities Materials that are used to create other products or that are used in commerce generally. Categories include energy, grains and other agricultural products, livestock, and metals. Investments are highly speculative, and prices can be highly volatile. There are a variety of ways to invest in commodities, including futures, futures index contracts, mutual funds/ETFs, royalty trusts and limited partnerships, and shares of a commodity-producing company. Because of the low initial margin requirement for investing in commodity futures and contracts, an investor could experience losses that exceed the initial investment. Art, antiques, collectibles, and gems Articles whose values are determined by the quality of an individual piece or collection as well as the overall market for that item. May involve storage and insurance concerns, and market for a given item may