Investing in Alternatives can mean many different things.
Depending on familiarity and experience, anything that falls outside what one is used to could be thought of as "alternative". If you grew up during the depression, just putting cash in the bank savings account or CD might have been "alternative" (at least relative to the mattress). Just beyond that extreme, most people are generally familiar with stocks and stock mutual funds, so for them, anything else might be considered alternative. And to those who focused only on broad market exposure or blue chip stocks, sector funds or commodities might seem alternative. Even within typical publicly traded instruments, there are focuses that some consider alternative, such as cannabis and cryptocurrency related companies. Yet another less mainstream corner of "traditional" publicly traded markets is the use of options.
But none of that is generally what is being referred to when talking about Alternative Investments. More typically, this means an investment that is not available to the general public—may be un- or differently-regulated, can come with illiquidity and perhaps opacity—in exchange for a different risk/return profile, sometimes different tax treatment, and in many cases de-correlation from the movement of public markets.
Real estate investing is most widely thought of as Alternative. This category is itself a wide and deep category, across physical use categories such as single family residential, multi-family, office, commercial and industrial. There are investment offerings that cut across or focus on each of these that fall on the equity side, on the debt side, and as hybrids. There are individual companies in the industry that can be invested in, and there are funds and ETFs that cut across many companies. Many of these offerings are publicly traded and SEC regulated—and some of those have designated their status as REITs. But those that are not publicly traded, the private placements (even non-public REITs), could be considered Alternative Investments. And such private investments in any sector would also be considered Alternative Investments.
Besides just being private investments, Alternatives have variation of focus along one or more of a few dimensions:
- Underlying asset focus (real estate, life settlement, litigation, medical, solar, wind, carbon, music, tax credits such as film or historic site)
- Purpose of financing (in real estate, this could be for Rehab, Bridge, Value-add, Hold/Operate; for film this could be for Production or Distribution, for example)
- Type of financing (equity ownership, collateralized/secured lending, unsecured lending)
- Instrument format (public stock, fund, ETF, private equity, private debt)
More and more, what was once Alternative starts to become mainstreamed through the existence of, and embracing by, the general investing community. Real estate once fit this definition, but now there are many ways to invest in the space, public and private. Similarly, we're seeing this happen with the emergence and evolution of cryptocurrencies and other assets based on blockchain technology.