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Why Young HNWIs Prefer Alternative Investments

Young investors with substantial capitals (High Net Worth Individuals, HNWIs) more and more often prefer alternative investments drifting away from putting money in stocks and bonds. They believe that they can earn more and protect themselves from risks associated with traditional markets. Research shows that 80% of HNWIs between the age of 21 and 42 choose to invest into innovative assets.

Non-standard investments include various categories such as hedge funds, private capital, real estate, and raw materials. These types of assets give opportunities for diversification and they are potentially profitable. However, certain risks are also associated with these assets, which requires serious analysis.

investment objects

Reasons for transition to alternative investments

Ultra High Net Worth Individuals (people whose capital exceeds 30 million US dollars) do not expect much profit from traditional assets such as securities. They believe that traditional markets are limited and they look for alternative investment options. In particular, they consider investing into innovative products. According to Fidelity, a research company, 64% of young investors believe that traditional markets are too unstable for achieving financial goals.

Economic factors such as inflation and volatility make investors look for more stable and potentially more profitable areas. Naturally, they want to lower the risks and protect their capitals.

Portfolio diversification is pivotal for cutting the risks. Investors prefer spreading their capital to different investment objects to keep their portfolio well-balanced. Non-standard investments allow creating a more balanced portfolio. According to PwC, more than 70% of investors choose alternative investment options to protect themselves from market fluctuations.

Many young investors try to invest in sustainable assets and they want to invest responsibly too. They take into consideration ecological, social, and corporate factors when choosing the investment objects. Investing in technologies and startups is also becoming popular. New financial instruments such as cryptocurrencies attract young HNWIs because they are innovative and they generate profits.

Types of alternative investment objects

Hedge funds manage assets by using complex investment strategies. These include hedging, short sales, and other methods of risk management. Hedge funds look for opportunities in various markets and try to make profits from fluctuation of prices. At the same time, they require large amounts of money. Hedge funds are often registered in Hong Kong.

Investing in private capital means investing in non-public companies. Investors take part in growing companies at an early stage or in the restructuring processes. Investing in private capital is both profitable and risky. Sometimes, return on investment occurs after a long period.  

Examples of alternative investment objects:

  • Real property; 
  • Works of art; 
  • Rare wines and whiskeys;
  • Wristwatches; 
  • Coins;
  • Furniture; 
  • Precious stones;
  • Cars;
  • Natural resources. 

Investors buy residential or commercial property to let it on a lease or to resell it at a higher price. You can use futures or related funds to invest in raw materials. Real assets serve to protect the investor from inflation and market fluctuations.

Structured products are complicated financial instruments. They may be a combination of various assets and derivatives. They serve the purposes of risk management and profit increase. However, understanding the nature of a structured product is a challenging task for the investor.

Alternative investments: advantages and risks

Alternative investment can bring higher profits in comparison to traditional assets. They can help reduce the portfolio volatility spreading risks across different assets. Non-traditional assets protect from market collapses and inflation. The investor gets a chance to diversify his/ her portfolio.

Main advantages of alternative investments:

  • Higher profitability;
  • Risk hedging;
  • Portfolio diversification;
  • Reduced volatility.

Nevertheless, alternative investments entail some risks too. One of the risks is low liquidity. It can be difficult to sell an asset fast. Assessing and analyzing such investment objects may be a demanding task. It takes deep knowledge and experience in financial matters.

Besides, some alternative assets may be hard  to understand for an investor. Non-standard financial strategies and  instruments are also non-trivial. It may be difficult for an investor to appraise the true value of an alternative asset. This, in turn, may lead to uncertainty in planning.

Main disadvantages of non-traditional investment instruments:

  • Insufficient liquidity;
  • Difficulties with value appraisal;
  • Uncertainty in long-term planning;
  • Limited number of experts.

Because choosing alternative investment objects is a difficult task, investors often need professional assistance. Our highly qualified experts would gladly help you choose suitable assets and determine investment strategies. Professional consultants will support you in choosing the right jurisdiction for registering an investment company. In this way, you will be able to lower the risks and hit the target.

Recommendations for investors

Investors should clearly understand what assets they hold and why they do it. This will help them make well-balanced decisions. It is also important to know about the risks associated with every asset. According to the national association of financial consultants, HNWIs who understand their investments very well demonstrate 30% higher financial performance.

Alternative assets can behave differently depending on the market conditions. Some of them may remain stable even if the market situation becomes unstable. Others may be more volatile. This factor has to be taken into consideration when designing an investment strategy. According to McKinsey, a consulting company, real estate investment trusts bring higher profits than securities in economically unstable situations.

You should consult a professional before changing your investment portfolio. The consultant will analyze the current situation and propose optimal solutions. According to research done by Vanguard Company, investors who use advice of financial consultants make 3% more in profits from their investment portfolios.

Please do not rush to alter your investment portfolio without proper analysis. Investing in alternative assets requires careful planning. You have to ascertain that the investment decisions that you make are in keeping with your long-term goals. Assess all pros and cons and make balanced decisions.

Examples of investment strategies

Some young investors who have chosen alternative assets have been able to make considerable profits. For example, Gary Vaynerchuk is known for investing in startups at early stages of their development. The entrepreneur invested in such companies as Facebook and Twitter when they only started operations. These investments brought Gary significant profits and strengthened his reputation as a successful investor.

Some investors build their portfolios in hedge funds for the sake of asset diversification. They use complicated investment strategies to obtain profits in various market conditions. Others prefer private capital investing into promising enterprises. They help young companies grow and reap fruit afterwards.

For example, Cathie Wood, the founder and the CEO of Ark Invest likes to invest in promising technologies such as artificial intelligence and biotechnologies. This approach has led to a considerable growth of her net worth.

Some investors use structured products by combining various assets in one investment instrument. This helps them increase profits and manage risks. Others choose real assets such as gold or real property to protect their portfolios. A combination of different investment strategies is able to contribute to stability of your portfolio and long-term growth of your profits.

Andreessen Horowitz venture company supports technological and innovative startups. Thanks to its support, such companies as Airbnb and Stripe have achieved impressive success.

Conclusion

Alternative investments give young HNWIs new opportunities for portfolio diversification and growth of profits. They can help reduce the risks and protect the capital when the markets are unstable. However, these investments require deep knowledge and understanding the nature of alternative assets. Investors have to make wise decisions. A consultation with a financial specialist is an important step to be taken before investing in alternative assets. Our experts will be happy to help you assess the risks and choose the optimal investment strategy. We will also gladly assist you with portfolio management depending on the amount of risk that you are prepared to tolerate.  

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