For most of us, investing means buying stocks and bonds. But there are other options that may offer higher returns and greater diversification. They're called alternative investments, and they've largely been reserved for professional investors and very wealthy people. Recently, however, brokerages have realised that normal folks make up a large market, so they've come up with ways for more people to invest like one-percenters.
Here's how to understand some of the more popular alt-asset types, what sets them apart from traditional investments, and how to figure out whether they belong in your portfolio.
What are alternative investments?
Alternative investments are any investments outside of stocks, bonds, and cash. Common examples include:
Real estate: property investments and real estate investment trusts (REITs)
Private markets: private equity, venture capital, and private credit
Commodities: gold, oil, and agricultural products
Hedge funds: pooled funds using complex strategies
Collectibles: art, wine, antiques, and even Beanie Babies or a lock of Mick Jagger's hair
Unlike traditional investments, alternatives aren't priced or valued in a way that directly correlates to public markets. Some use non-traditional strategies like shorting or arbitrage (taking advantage of price differences between markets).
As with everything else, not all investments are created equal. The vast universe of alternative investments provides a wide range of investments with meaningful downside risk, so proceed with caution.
Traditional vs. alternative investments
Think of traditional investments as the items you find in almost every portfolio: stocks, bonds, and cash. They're publicly traded, easy to buy and sell, and their prices are updated constantly during market hours.
Alternative investments are everything else. They exist outside the public stock exchange. Because they don't always move in lockstep with the stock market, they can act as a counterweight in your portfolio — when stocks zig, alternatives might zag.
What defines alternative investments?
Alternative investments cover many different asset types and strategies, but they often share a few common structural features:
Complexity: often involves strategies or structures that require specialised knowledge
Illiquidity: selling can take time, and investments may be locked in for months or years
Valuation: values are often estimated periodically (e.g., quarterly) using appraisals or models rather than continuous market pricing
Regulation: may be subject to different rules than publicly traded investments, and historically was more accessible to wealthy investors
How do alternative investments work?
Here's how they typically operate:
Fund structure: most alternatives are pooled funds where multiple investors contribute capital
Lock-up periods: capital may be committed for an extended period
Periodic valuation: unlike stocks with real-time pricing, alternatives are valued quarterly or annually
Distributions: returns come through interest payments, dividends, or eventual sale of the underlying assets
What are the most common types of alternative investments?
Four of the biggest alternative investment categories are venture capital, private equity, private credit, and infrastructure. Here's a quick chart to help you understand the differences.
Venture capital | Private equity | Private credit | Infrastructure | |
|---|---|---|---|---|
| Description | Equity investments in early-stage companies and small software companies. | Equity investments in mid-sized to large enterprises in stable industries that aren't listed on public exchanges. | Loans to mid-sized to large enterprises in stable industries that aren't listed on public exchanges. | Loans or equity investments in projects that might have cash flows tied to inflation, like toll roads, parking meters, or energy transmission. |
| Nature of returns | Appreciation in the value of a company, realised when the company is sold (e.g., acquisition or IPO). Historical returns are above the public equity market. | Appreciation in the value of a company, typically realised on exit (e.g., sale or public listing). | Interest payments from borrowers to the fund that are distributed monthly, with the potential for some appreciation in value. | Appreciation in the value of the investments and/or interest payments, depending on the structure of the investment. |
| Historical risk | Higher than public equities. The main risk is that small companies may not grow into much larger companies. | Higher than public equities. Main risk is that the company operations and value do not improve as forecasted. | Lower than public equities (similar to high-yield bonds). The main risk is that a borrower may not repay the fund. | Similar to public equities. The main risk is that the projects may not be as profitable as forecast, for macroeconomic or operational reasons. |
| Added diversification | Low. Similar to public equities. | Low. Similar to public equities. | Medium/high. Provides diversification to rising interest rates. | Medium. Provides diversification to rising inflation. |
And here's a more in-depth breakdown:
Private equity typically targets more mature private companies, often taking significant ownership and using operational and financial strategies to improve performance before exiting.
This can be risky, since private equity investors don't always succeed at revamping companies. But the risk can pay off: from 2008 to 2022, they returned about 12% per year, outperforming stocks globally by 5.7%.
Private credit funds work like bonds, in that they loan money to companies in exchange for interest payments — a nice way for investors to earn consistent income. Unlike bonds, private credit funds offer returns more in the range of stocks, returning about 9% per year over the past 15 years. Yet they're considered lower risk than stocks.
Venture capital involves providing capital to support growth, with returns depending on whether the companies succeed. Venture funds are risky since they often bet on companies developing unproven tech (or with unproven leadership — remember Theranos?). However, over the 15-year period shown above, venture funds returned almost 10% per year, outperforming global stocks by about 4%.
Infrastructure and real assets involve financing big projects that make the world work — train tracks, docks, pipelines, or highways. Because the cash flows are both stable and closely tied to economic activity, some of these funds can provide diversification and resilience to inflation.
What are the benefits of alternative investments?
Alternative investments offer two main advantages:
Potential for higher returns: historically, alternatives have outperformed global stocks and cash in certain periods (see chart above comparing January 2011 to June 2024)
Diversification: when stocks perform poorly, alternatives may hold steady or even gain, helping balance your portfolio
Since it's hard to predict what asset class will perform well in any given year, many investors spread their money across multiple categories.
What are the drawbacks of alternative investments?
Though these don't pertain to all alternative investments or strategies, the main drawbacks are:
Higher minimums and fees: alternative assets require specialised knowledge to manage, and that expertise comes at a cost
Higher volatility: prices can swing more dramatically than stocks, especially on the downside
Illiquidity: these aren't listed on public exchanges, so selling quickly when you need cash can be difficult or impossible
Barriers to entry: for example, some collectibles can be priced far beyond most investors' budgets
How Canadians can access alternative investments
For a long time, access was limited. To get into PE or hedge funds, you typically needed to be an "accredited investor" — meaning you had a high income (usually over $200,000) or significant financial assets.
But the landscape is shifting. Today, everyday investors in Canada have more options:
Public proxies: buy exchange-traded funds (ETFs) or mutual funds that provide exposure to alternatives (e.g., REITs or infrastructure companies)
Liquid alternatives: mutual funds or ETFs that use hedge fund-style strategies (e.g., short selling) and trade on public markets
Digital platforms: online platforms that offer access to alternative investments with lower minimum asset requirements than some traditional providers
Are alternative investments right for you?
Just because you can invest in alternatives doesn't mean you should. Consider them if you have:
A longer time horizon: think years, not months, because your money may be locked up
Liquidity elsewhere: you won't need this cash for near-term expenses
Risk tolerance: you're comfortable with illiquidity risk, even if price swings are less dramatic than tech stocks
If you're building a long-term portfolio and want diversification beyond stocks and bonds, allocating a slice to alternatives could make sense. But if you need that cash within a year or two, stick to liquid options.
