Alternative investments offer diversification and potential for higher returns. This guide explores top options for 2024 and provides insights on managed futures and commodities.

Top Alternative Investments for 2024

1. Real Estate Investment Trusts (REITs)

REITs allow investors to gain exposure to real estate without direct property ownership. They offer steady income through dividends and potential for capital appreciation.

Benefits:

• Regular income stream
• Portfolio diversification
• Liquidity compared to direct property investments

Risks:

• Sensitivity to interest rate changes
• Potential for overvaluation in certain sectors

According to Nareit, REITs delivered an average annual total return of 9.6% over the past 20 years ^[1].

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2. Private Equity

Private equity involves investing in companies not listed on public exchanges. This option suits investors seeking higher returns and willing to accept longer investment horizons.

Benefits:

• Potential for high returns
• Access to innovative companies
• Active management expertise

Risks:

• Illiquidity
• Higher fees compared to public market investments
• Complexity in valuation

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3. Hedge Funds

Hedge funds use various strategies to generate returns, often aiming for absolute returns regardless of market conditions.

Benefits:

• Potential for uncorrelated returns
• Downside protection in market downturns
• Access to sophisticated strategies

Risks:

• High fees (typically 2% management fee and 20% performance fee)
• Limited transparency
• Potential for significant losses

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4. Commodities

Commodities include physical goods like gold, oil, and agricultural products. They offer diversification and inflation protection.

Benefits:

• Portfolio diversification
• Hedge against inflation
• Tangible asset backing

Risks:

• Price volatility
• Storage and insurance costs for physical commodities
• Complexity of futures contracts

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5. Cryptocurrency

Despite volatility, cryptocurrencies like Bitcoin and Ethereum remain popular alternative investments.

Benefits:

• Potential for high returns
• Decentralization and blockchain technology potential
• 24/7 market access

Risks:

• Extreme price volatility
• Regulatory uncertainty
• Security concerns

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6. Fine Art and Collectibles

Investing in art and collectibles offers potential for appreciation and personal enjoyment.

Benefits:

• Potential for significant appreciation
• Enjoyment and prestige of ownership
• Hedge against inflation

Risks:

• Illiquidity
• Subjectivity in valuation
• Storage and insurance costs

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7. Peer-to-Peer Lending

P2P lending platforms connect borrowers with individual lenders, offering potentially higher yields than traditional fixed-income investments.

Benefits:

• Higher potential yields
• Monthly income stream
• Diversification across multiple loans

Risks:

• Default risk
• Platform risk
• Regulatory changes

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8. Infrastructure Investments

Infrastructure investments involve assets like roads, bridges, and utilities, offering stable long-term returns.

Benefits:

• Stable, long-term cash flows
• Inflation protection
• Essential services with consistent demand

Risks:

• Political and regulatory risks
• Large capital requirements
• Long investment horizons

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9. Timber

Timber investments offer a unique combination of land ownership and commodity exposure.

Benefits:

• Biological growth regardless of market conditions
• Land appreciation potential
• Hedge against inflation

Risks:

• Long investment horizons
• Natural disasters and pests
• Market demand fluctuations

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10. Managed Futures

Managed futures involve professional money managers trading futures contracts across various asset classes.

Benefits:

• Potential for returns in both up and down markets
• Portfolio diversification
• Professional management

Risks:

• High fees
• Complexity of strategies
• Potential for significant losses in volatile markets

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How to Start Investing in Managed Futures

Managed futures offer a way to diversify your portfolio and potentially profit from trends across various markets. Here's how to get started:

1. Understand the basics

Managed futures involve professional money managers (Commodity Trading Advisors or CTAs) trading futures contracts across different asset classes, including commodities, currencies, and stock indices.

2. Assess your risk tolerance

Managed futures can be volatile. Ensure you're comfortable with potential losses and have a long-term investment horizon.

3. Choose an investment vehicle

Options include:

• Managed futures mutual funds
• Exchange-traded funds (ETFs) focused on managed futures
• Individual managed accounts with CTAs
• Managed futures hedge funds

4. Research and select a manager or fund‍

Consider:

• Track record and performance history
• Investment strategy and approach
• Fees and minimum investment requirements
• Regulatory compliance and transparency

5. Open an account

For mutual funds or ETFs, you can invest through a standard brokerage account. For individual managed accounts or hedge funds, you'll need to meet accredited investor requirements.

6. Start with a small allocation

Begin with a small portion of your portfolio (e.g., 5-10%) to gain experience and understand the investment's behavior.

7. Monitor performance

Regularly review your investment's performance and how it complements your overall portfolio.

8. Consult with a financial advisor

A professional can help you determine if managed futures fit your investment goals and risk profile.

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Risks Associated with Investing in Commodities

Commodities can offer diversification benefits, but they come with unique risks:

1. Price volatility

Commodity prices can fluctuate dramatically due to:

• Supply and demand imbalances
• Geopolitical events
• Weather conditions
• Currency fluctuations

2. Leverage risk

Many commodity investments use futures contracts, which involve leverage. This can amplify both gains and losses.

3. Contango and backwardation

These market conditions can impact returns for commodity futures investments:

• Contango: Future prices higher than spot prices, potentially eroding returns
• Backwardation: Future prices lower than spot prices, potentially enhancing returns

4. Storage and insurance costs

For physical commodities, costs associated with storage and insurance can eat into returns.

5. Regulatory risk

Changes in regulations can impact commodity production, trading, and pricing.

6. Liquidity risk

Some commodity markets may have limited liquidity, making it difficult to enter or exit positions at desired prices.

7. Counterparty risk

When trading futures or over-the-counter contracts, there's a risk that the counterparty may default on their obligations.

8. Currency risk

For international commodities, exchange rate fluctuations can impact returns for investors in different currencies.

9. Technological disruption

Advances in technology can significantly impact commodity supply and demand, potentially leading to price shifts.

10. Lack of income

Unlike stocks or bonds, commodities don't provide regular income through dividends or interest payments.

To mitigate these risks:

• Diversify across different commodities and asset classes
• Use stop-loss orders to limit potential losses
• Consider commodity ETFs or mutual funds for professional management
• Stay informed about global economic and political events affecting commodity markets
• Regularly rebalance your portfolio to maintain desired allocations

Alternative investments can enhance portfolio diversification and potentially boost returns. However, they often come with higher risks and complexities. Carefully consider your investment goals, risk tolerance, and time horizon before adding alternative investments to your portfolio. Consulting with a financial advisor can help you make informed decisions aligned with your overall financial strategy.