Alternative Investment Strategies: A Guide to Asset Classes and Investment Approaches

The alternative investment market is experiencing significant growth and is projected to reach $32 trillion in assets under management by 2030. This growth is driven in part by the desire to invest in assets with low correlation to public markets. At the same time, evergreen funds are broadening access to alternative investments, creating opportunities for more investors to gain exposure.

In this article, we’ll explore the alternative investment strategies available to investors. You’ll learn about: 

• Characteristics of alternative investments
• Differences between alternative and traditional investments 
• Popular asset classes for alternative investments
• Common alternative investment approaches
• Ways to invest in alternative assets

What Are Alternative Investments?

The term “alternative investment” refers to all financial assets outside the three considered “traditional”: stocks, bonds, and cash. So any asset that can serve as an investment and is not a part of the traditional category is an alternative asset. 

Historically, alternative investments have been favoured by high-net-worth individuals and institutional investors. Recently, however, the lowering of minimum capital requirements and the increased flexibility brought on by open-end funds have made it easier to incorporate alternative assets into portfolios held by a broader base of investors.

The characteristics of alternative investments most important to investors include: 

• Illiquidity and lock-up periods: Most alternative assets can’t be sold quickly or on demand. Many alternative investment vehicles require capital commitment for several years before being distributed to investors
• Complexity and higher fees: Alternative investments involve hard-to-value assets, sophisticated structures, and active management. Because of the effort and expertise involved, alternative investments can also have significant management fees and performance bonuses
• Less regulatory oversight and transparency: Because alternative investments are not publicly traded, they attract limited regulatory oversight. As a consequence, alternative investments are also less transparent, putting more importance on due diligence

Alternative Investments vs Traditional Investments

Another way to understand the traits of alternative investments is through comparison with traditional investments: 

Feature	Alternative Investments	Traditional Investments
Variety of investments	High	Lower, limited to regulated public market securities
Liquidity	Potentially lower liquidity profile	High liquidity profile, with same-day trading
Minimum investment	Not as affordable, sometimes limited to qualified investors	Very affordable, no effective investment minimums
Correlation to public markets	Low; largely independent of stocks and bonds	High; returns closely tied to market performance
Return drivers	Manager skills, illiquidity premiums, asset-generated income	Broad market beta
Role in portfolio	Diversifier, return enhancer, inflation hedging	Core holding

Top Alternative Asset Classes

The broad definition of alternative investments encompasses many asset classes. The most popular alternative asset classes for investment include: 

1. Real estate
2. Private equity
3. Hedge funds
4. Real assets
5. Private credit

Real Estate

Real estate comprises core and non-core sectors, each with distinct risk and reward profiles. The core properties include commercial real estate (such as offices and retail), industrial properties (e.g., warehouses), and residential properties (including apartments and multi-family units). The non-core types of properties include hospitality, assisted living, and student living properties.

Here are some of the important characteristics of real estate as an alternative asset class: 

• For core real estate, returns are driven more by asset-generated income than appreciation
• Real estate tends to be resilient in most market downturns
• Real estate has historically served as an effective inflation hedge

There are different ways to gain exposure to real estate investment. Real estate investment trusts (REITs) are a good, liquid entry point. Private real estate funds are their illiquid counterparts. 

You can also invest through direct ownership. In that case, accurate property valuation and local market knowledge are critical for maximising returns.

Bonus read: Interested in obtaining residency through property investment? Explore our guides on real estate residency programs in Latvia, Mauritius, Turkey, Panama, and Cambodia.

Private Equity

Private equity is an investment in non-listed companies. There are three categories of private equity, which correspond with different stages of a company’s lifecycle: 

1. Venture capital: An investment that focuses on startups and early-stage ventures
2. Growth capital: An investment into more mature companies looking to grow or restructure
3. Buyout: An outright purchase of a company or one of its parts

The important characteristics of investments into private equity include: 

• A long lock-up after making the investment
• Prolonged involvement of direct investors and fund managers with the company to offer expertise, assistance, or mentoring
• A much broader set of opportunities than public equity, since the vast majority of companies in the world are privately held

To gain exposure to private equity, you would typically use a closed-end fund structure that commits your investment for a significant period, offering low liquidity. You can also invest directly in a private company.

Hedge Funds

Hedge funds are usually structured as limited partnerships of investors who pool their capital and invest it in various assets. To achieve the fund’s goal of generating consistent returns regardless of market conditions, a hedge fund manager will use strategies to capitalise on market movements and protect against downturns. 

Some of the reasons why investing in hedge funds might be attractive include: 

• Their ability to capitalise on market volatility using instruments such as derivatives
• The stabilising effect hedge funds can have on portfolios
• The ability to generate a high return rate regardless of market direction

However, it’s important to note that a hedge fund’s performance is highly dependent on the manager’s skills. The dispersion of managers’ performance is likely higher than in any other alternative investment type, requiring you to do significant due diligence before investing in a fund.

Hedge funds are among the more exclusive alternative investment assets. Typically, you need to be a high-net-worth individual or an institutional investor to be able to invest in a hedge fund. 

Real Assets

Real assets is a broad term that encompasses all tangible assets. In addition to real estate, popular types of real assets for investment include: 

• Commodities, which typically refer to natural resources such as energy, metals, agricultural products, and timber
• Collectables, which can refer to items such as art, vintage cars, wine, coins, or even baseball cards
• Infrastructure, which can include roads, bridges, utilities, energy companies, and telecommunications companies

Risk profile and investor requirements differ among the types of real assets. Collectables, for example, can be high-risk since they are difficult to price, and even the slightest damage can reduce their value. 

On the other hand, commodities have proven to be stable assets that move independently of market direction but are dependent on supply and demand. Infrastructure can range from low-risk, income-generating assets like utilities to higher-risk opportunistic investments such as ground-up developments.

Private Credit

Private credit typically involves lending capital to small and medium-sized companies that don’t have access to traditional credit providers. As banks reduce lending to these types of businesses, private credit plays the critical role of providing them with funding. 

Some of the benefits of investing in private credit include: 

• Potential for a steady income higher than what’s offered by traditional fixed income markets
• Solid downside-risk mitigation, provided that loans are well-structured
• Access to a broad spectrum of opportunities, similar to private equity

You can invest in private credit directly, as an individual investor, or through business development companies or different types of funds.

Alternative Investment Strategies

Alternative assets can serve different roles in your portfolio, depending on your objectives. Rather than treating them as a single category, you can allocate capital to alternative assets to achieve specific strategic goals. 

The three most common objectives that drive alternative investment strategies include:

1. Diversification
2. Return enhancement
3. Income generation

Diversification

Diversification is an investment strategy that aims to mitigate risk through exposure to a variety of asset classes and markets. Because they typically have low correlation to public markets, alternative investments often play a significant role in portfolio diversification strategies. 

Even though alternative investments are generally a good choice for diversification, certain asset classes perform better than others. Popular assets for diversification include: 

• Real estate
• Core private credit
• Certain real assets, such as infrastructure and timber
• Hedge funds

In addition to diversification through asset allocation, you may also consider geographic diversification, i.e., purchasing assets in different physical locations or legal jurisdictions. Purchasing real estate abroad is a good example of geographic diversification.

Return Enhancement

Investors looking for return potential unavailable in public markets often turn to alternative assets such as private equity. 

By investing in companies before they go public, investors can capture the value growth occurring during the most dynamic stages of the company’s development. Access to opportunities, active management, and operational improvements drive private equity’s potential to outperform public markets. 

Income Generation

Alternative investments can provide steady income streams with low correlation to traditional fixed income. Real estate is one of the main income-producing assets, with other popular options including certain types of private credit and income-generating real assets like infrastructure and farmland.

An additional benefit of this strategy is that many alternative assets you can invest in for income generation can also serve as a hedge against inflation.

How To Invest in Alternative Assets

There are three main methods for investing in alternative assets:

1. Direct investment
2. Co-investment
3. Investment in funds

Direct Investment

The direct investment method allows you to place your investments directly, without using an intermediary or professional management. Some examples include: 

• Purchasing real estate
• Acquiring a stake in a private company
• Providing loans to private companies
• Purchasing precious metals

The two main benefits of this method include: 

1. Not having to pay any asset management fees
2. Having greater control over which assets you hold in your portfolio and for how long

However, direct investment also has certain drawbacks. The most significant is a potentially higher barrier to entry than other methods, as it requires more knowledge, skills and, in some cases, a larger minimum capital requirement. 

Co-Investment

Co-investment allows investing directly alongside established funds to benefit from their institutional expertise. This is achieved by securing co-investment rights, which allow you to take a direct stake in an alternative asset that the fund is also investing in. 

The key benefit of this method is the opportunity to learn investment skills you can later use for your own direct investments. You can also avoid paying management fees on the capital you used from the direct investment. 

The drawbacks of this method are the following:

• You have limited control over the asset selection process
• The fund might offer less attractive options to co-investors
• You have to be actively involved in evaluating investment opportunities and fund managers

Investment in Funds

Investing in a fund means pooling capital into a single vehicle and allowing fund managers to deploy it across a portfolio of alternative assets in your name. This is the most accessible entry point into alternative asset investing, as it requires less skill, knowledge, or capital than other methods. Another benefit is that it doesn’t require as much time on your part. 

The downsides of using funds to invest in alternative assets include: 

• Management and performance fees
• Extensive upfront due diligence requirements
• Potential exit restrictions that may lock up your capital within the fund for a predetermined time without the possibility of exit

In terms of access to capital, the main alternative investment fund structures you will come across are drawdown (closed-end) and evergreen (open-end) funds. Here’s a comparison of the two: 

Feature	Drawdown Funds	Evergreen Funds
Capital commitment	Upfront, with deployment over time	Immediate investment upon subscription
Fund life	7–12 years	Long-term or unlimited
Liquidity	Capital and gains are locked up until fund maturity	Gains are distributed periodically
Return profile	Early negative returns before performance picks up (J-curve)	Immediate exposure and ongoing deployment reduce the J-curve

Within these structures, you will encounter different investment vehicles, such as: 

• Business development companies (BDCs), which provide loans and equity capital for small and middle-market companies
• Interval funds, which tend to be closed-end and offer liquidity through share repurchase offers, targeting assets that are not too liquid
• Non-traded real estate investment trusts (REITs), which own income-producing real estate and are not listed
• Operating companies (OpCos), which are businesses that directly own and operate commercial or real assets and are not structured as funds 

Investing in Alternative Assets Abroad

Investing in alternative assets in foreign jurisdictions adds another layer of diversification to your portfolio, protecting you from potential disruptions caused by political or financial instability in your home jurisdiction. It can also give you even broader access to investment opportunities, with some jurisdictions even offering immigration status that facilitates travel and stay in the country.

Navigating foreign markets requires local knowledge and an understanding of the regulatory and tax framework in each jurisdiction. Contact Nomad Capitalist to work with an advisor who has on-the-ground experience in your target markets.

Invest in Foreign Alternative Assets With Nomad Capitalist

Nomad Capitalist is an advisory firm that specialises in wealth protection and global mobility. We’ve helped over 1,500 clients achieve their financial and lifestyle goals by capitalising on investment opportunities abroad, legally reducing tax exposure, and securing residency or citizenship in tax-efficient jurisdictions. 

Our flagship service is the Action Plan. The Plan takes your current situation as a starting point and your desired outcome as a target, providing all the necessary steps to bridge the gap. Because of that approach, the Plan we develop for you is tailored to your needs, and not a standardised, generic roadmap. 

Here’s what partnering with Nomad Capitalist looks like: 

1. We ask you to fill out a form to help us determine if we’re a good match
2. We schedule a 45-minute onboarding call to learn more about your circumstances and goals 
3. Our agents create an Action Plan and present it to you for approval
4. We implement the Plan over a 12-month period, and manage the administrative parts
5. You continue receiving support from us even after the Plan is implemented

Nomad Capitalist can help you diversify your portfolio with alternative investments abroad. We can advise you on real estate, fund, and private equity investments and highlight opportunities to use those investments for securing residency or even citizenship in tax-friendly jurisdictions. To find out more about how investing in alternative assets abroad can reduce your tax liability, contact Nomad Capitalist today!