In fact, one of the most common alternative investments is real estate. Some less common ones are collectibles, venture capital, and hedge funds. That said, there are many other ways that people choose to invest their money.
Types of Alternative Investments
Alternative investing is investing your money in other avenues, such as private markets, rather than traditional markets. This includes a variety of options like:
- Private Equity
- Private Debt and Credit
- Real Estate
- Hedge Funds
- Commodities
- Real Assets
- Liquid Alternatives
- Venture Capital
- Cryptocurrency
- Music Royalties
- Fine Art
- Whisky Casks
- Trading Cards
- Natural Gas and Other Natural Resources
- High-Yield Bonds
These alternative investment strategies can be a bit riskier than traditional ones due to liquidity risk, but they can also be much more lucrative. Each one of these underlying assets has its own process, so how you will invest in these alternative investment solutions will depend on the alternative investment that you choose.
How to Invest in Alternative Investments
How you invest in many alternative investments depends on the type that you want to invest in. They can’t be bought on the typical stock market, but there are simple avenues you can use to embark on each investment. There are also tools such as the J-curve, net asset value, correlation with equities, ESG screening, trailing commissions, and management expense ratio that you can use to determine what you wish to invest in.
Private Equity
When it comes to private equity investments, you can invest in companies looking for private investments or a fund of funds through private equity firms. There are actually many companies that offer private equities, including online brokerages and financial advisors.
From there, you can invest however much you choose and how you choose to invest them. Many companies also offer private equity mutual fund investments, which are outside traditional asset classes and pooled funds. As an investor, you can also earn an extra fee known as an illiquidity premium.
Private Debt and Credit
Private debt and credit investing is a great way for an investor to diversify their portfolio, especially if interest rates are high. There are many sites tailored to private investors, or companies like Wealthsimple offer funds that private investors can pool their money into. This is also referred to as direct lending and even pertains to distressed debt.
Real Estate
To invest in real estate, you mainly need to provide a down payment and have good credit. Once you have that, the idea is to rent out the property to generate passive income. Once the property value has increased, you can then sell the property or use the equity in the home to purchase another property. It just evolves from there.
Some important factors you need to consider with real estate investing, including cap rate, rental yields and more. These can help you determine how to invest and when to let go of your investment.
Hedge Funds
In Canada, you can choose to invest in hedge funds through fund managers or start your own. Existing hedge funds are regulated by both provincial and federal laws and are offered only to accredited investors. You can speak to your financial advisor to get a better sense of which hedge fund will work best for you.
Commodities
When it comes to commodities, there are a few different ways that you can invest by using alternative strategies. You can do this by purchasing the physical commodity, buying stocks of companies that produce it, purchasing futures contracts, or investing in mutual funds or ETFs that track the commodity. A good example of this is gold, as well as other precious metals. That said, these aren’t going to be found on fixed-income markets but can be found on secondary markets.
Real Assets
Real assets are when you purchase the actual investment instead of the stocks of the investment. These are considered to be more lucrative because these investments you’re dealing with a tangible object, and these always tend to hold more value. However, this often involves asset allocation rather than private-market alternatives. There’s also the risk of illiquidity and of loss of funds to consider, since values change frequently.
Venture Capital
If you’re looking to invest in venture funds, the easiest way to do so is through a venture capital firm, which is often structured as a limited partnership with both limited and general partners. These firms invest in new businesses by raising capital from many investors rather than banks. This makes it a great growth opportunity for both the investor and the business owner. The return you get on your investment is based on the terms of the deal. However, there usually is a lock-up period where you can’t sell for a certain period of time before you buy, which means short positions aren’t possible.
Cryptocurrency
While Cryptocurrency isn’t considered to be legal tender, it is a form of payment that uses encryption algorithms. It’s designed to operate over a computer network and isn’t reliant on an authority or government, unlike the current legal tender.
If you wish to obtain or invest in Cryptocurrency, you can do so by mining it yourself or purchasing it. There are plenty of crypto investing sites, as well as Wealthsimple, that allow you to invest in crypto. Since there are many types of Crypto, you want to choose a site that has the one you’re looking for. It will provide periodic pricing changes that will affect aspects of your portfolio account.
When you invest in crypto, though, your costs will vary based on how you invest. Whether you use cold storage wallets or choose Bitcoin ETFs, it will vary. The type of crypto, like a stablecoin, will also make a difference.
What is an Accredited Investor?
In Canada, an accredited investor is either an individual or an entity that is given special status under National Instrument 45-106 to purchase high-risk, private market securities. Some examples of private securities include:
- Venture capital
- Private capital
- Hedge funds
To qualify as an individual, you’re going to have to meet at least one of these specific income or asset thresholds:
- A net pre-tax income of $200,000 in both of the last 2 calendar years ($300,000 with a spouse)
- Assets worth at least $1,000,000 net of any related debt
- Total net assets of $5,000,000, which does include your primary residence
Part of the reason for this is capital calls. You may be required to put up the money you previously requested with minimal notice.
Mortgage Investment Corporations and How They Work
As an alternative to traditional banks, Mortgage Investment Corporations are specialized Canadian companies that pool funds from multiple investors to finance private mortgages. How it works is investors purchase a share of the MIC, and professional managers then use those funds to issue both private and alternative mortgages. The high interest rates and fees that borrowers pay are then distributed to investors as regular dividend income or carried interest. This makes it very different from peer-to-peer lending, but similar to infrastructure funding.
How Many Alternatives Should Be in Your Portfolio?
While your portfolio’s composition depends on your risk tolerance, the consensus is that you should allocate 5% to 20% of your portfolio to investments. It’s also recommended that they should be split across 2-4 asset classes. This is because it allows you to take advantage of both portfolio diversification and risk reduction without making your portfolio overly complex. Ideally, you’d want a 60/40 portfolio where 60% of your funds are in one type of investment, and 40% in another.
This strategy can be used alongside capital preservation, which involves investing in lower-volatility investments such as low-risk publicly listed companies, publicly traded investments on public exchanges, high-interest savings accounts, Guaranteed Income Certificates, fixed-income securities, and certain Exchange Traded Funds. However, there are many other strategies you can use, including global macro.
Farmland, Timberland and Infrastructure Investing
While these are all different alternative asset classes you can invest in, they all offer stable cash flows, strong inflation-hedging, and even low correlation with traditional stocks. Often, major institutional managers group these for long-term liabilities.
Farmland: With farmland investing, land values and crop prices have historically tracked and even exceeded inflation rates. It has steady demand, driven by both population growth and rising food security needs.
Timberland: It provides long-term tree growth and cash flow from periodic harvesting. On top of that, the underlying timber and land provide downside protection and a focus on sustainability through carbon credits and sustainable forest management.
Infrastructure: This includes essential services such as utilities, power transmission, pipelines and even transportation networks. It’s also popular for predictable revenue from regulated or long-term contracted cash flows with reliable yields, and for its economic resilience, given its stable performance in markets.
Equity Crowdfunding Platforms
One way private companies raise capital is through equity crowdfunding platforms. It does this by issuing shares to both everyday and accredited investors online. If you’re looking to invest, here are some of the best crowdfunding platforms you can use.
| Equity Platforms | Description |
| FrontFundr | It’s the largest private markets investing platform in Canada. It operates as an exempt market dealer that is open to retail and accredited investors throughout most of the country. |
| Equivesto | It’s a regulated portal that specializes in Canadian early-stage companies, real estate, and even small and medium-sized enterprises. They’re known for having low minimums and offering educational resources. |
| Vested | It’s a platform that focuses on Canadian tech and growth-focused private companies. |
Crypto Gains and Taxes
The only time that crypto gains are taxed as business income is when your trading activity is considered commercial business. This means that 100% of your profits are taxed as regular income. If your trading isn’t considered to be business income, though, then you’re going to be taxed as capital instead.
Capital gains taxes apply when you purchase and hold crypto as a long-term investment. This means that only 50% of the realized capital gains are included in your taxable income. They’re reported on your personal tax return using Schedule 3, and the only thing that can offset them is capital losses. However, it’s only calculated using your adjusted cost base.
What is an Offering Memorandum Exemption?
If you are interested in investing, you may have heard of an Offering Memorandum Exemption. It is a rule in securities law that allows companies to sell stocks or bonds to investors without having to file an official document known as a prospectus. Instead, the buyer will get a shorter disclosure paper known as an offering memorandum.
When a company issues an offering memorandum, it must include business details, officers’ backgrounds, and project risks. They must also have the buyer sign a risk acknowledgement form and provide annual updates and financial statements due to higher risk-adjusted returns.
The Costs of Holding Bullion
When you’re holding physical bullion, there are going to be more costs involved than you may think. The highest costs to consider are bullion storage and insurance, which can cost anywhere from 0.5% to 1.5% of your total portfolio value for the year. That said, this will depend on whether you choose to keep your precious metals at home, at the bank, or in a professional, secure vault depository.
If you’re looking at the costs more plainly, then storage fees can range from $300 to $2,000 with no additional annual fees. In terms of insurance, the cost of standard homeowner policies on precious metals and cash ranges from $200 to $1,000. There’s also a “scheduled personal property rider,” which can cost 1% to 2% of the insured value annually.
It’s also important to consider where you purchase the bullion, like through the Royal Canadian Mint. An alternative to purchasing bullion is to invest in gold ETFs in a tax-efficient structure like a TFSA or RRSP.
Inflation Hedge and Alternative Investments
When it comes to alternative investments, they hedge against inflation in a few different ways, including:
- Tying returns to physical replacement costs
- Tying returns to cash flows with built-in price escalators
- Tying returns to scarce tangible supplies
Alternative assets like real estate, private debt, and infrastructure increase consumer prices, raise asset values, and grow operational revenue streams.
Which is Better: Angel Investing or Capital Firms?
When it comes to alternative investing, you have a choice between angel investors and capital firms, and deciding which to use can be difficult. The fact is, neither one of them is specifically better, but one of the two options may be better for you.
| Angel Investing | Venture Capital Firms |
| The best option for early-stage start-ups seeking $500,000 or less. | The best bet for companies that already have proven market traction and high-growth metrics. |
| The fund typically ranges from $10,000 to $100,000 per individual. | Funding typically $1,000,000 and up. |
| A decision can take days or a couple of weeks. | Slower approval process, and it can take anywhere from 6 to 12 weeks. |
| Hands-off control and board seating are rarely demanded. | More control is required through equity, voting rights, and board seats. |
| Offers personal mentorship and flexible terms. | It can provide many opportunities, including follow-up capital and extensive hiring networks. |
How Private Fund Valuations are Determined
Fund managers determine private fund valuations using periodic fair market assessments, usually updated quarterly. Because these assets don’t have active public trading, the manager estimates values using specific frameworks:
Market Approach: To apply this approach, you use price, revenue, or EBITDA multiples from either similar public companies or recent private buyouts.
Income Approach: This approach uses a risk-adjusted rate to predict future cash flows for a portfolio company and discount them to present value.
Asset-Based Approach: This approach is mainly used in asset-heavy sectors such as real estate and is calculated by adding up total tangible assets and subtracting liabilities.
As an investor, the Sharpe ratio can help you determine your risk-adjusted return. While it can’t predict your interest payments,
Real Estate Funds as Alternative Investments
Real Estate Investment Trusts (REITs), also known as real estate funds, are structured investments that are actually very similar to mutual funds. They only differ because they don’t physically hold any stocks. They do, however, allow investors to invest in real estate without purchasing the physical asset.
When it comes to investing in this particular alternative investment, you need to keep in mind that there are 3 types: Publicly Traded, Publicly Non-Traded, and privately non-traded. That said, the most common type is Publicly Traded.
Publicly traded REITs are commonly invested in because they’re traded on public markets; in Canada, this is the Toronto Stock Exchange (TSX). The other two aren’t sold on exchanges, which can make purchasing them more difficult. Private Non-Traded are available only to high-net-worth individuals, whereas Public Non-Traded are typically purchased through real estate crowdfunding platforms.
Why Choose Alternative Investments
Due to changing market conditions in the capital markets, most investors, including institutional and retail investors, look for investment strategies that provide reliable income streams and that alternative investments work. Alternatively, those funds (also referred to as low-correlation funds), such as real estate holdings, provide a diversified portfolio alongside traditional assets, subject to the same regulatory requirements.
When looking into alternative investments, though, investment knowledge is key. Whether you look for investment advice for portfolio managers using the economic outlook information contained in their database, or do the research yourself on past performance and upcoming projections, it’s important. You should also have downside protection as part of your investment objectives to protect your investments and real assets.
Even though alternative investments aren’t usually fixed-income and have higher investment minimums than traditional markets, rising interest rates are prompting financial advisors and experienced investors to look into other investments rather than just traditional stocks. These investment options allow you to generate higher returns while offering a broad range of investment options. Adding alternatives to a traditional portfolio can reduce your risk and provide innovative solutions to stabilize your income, rather than just selling securities.
