The evolution of alternative investments

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What do a tulip, a bottle of whiskey, Super Mario 64 and a future real estate development project have in common?

If you are smart enough to guess from the title of this article that these are all alternative investments, you would be right. All of these are – or have been – successful investment opportunities. Each article rewarded smart investors who dared to invest their money in non-traditional investments as opposed to stocks or bonds.

How was this alternative market born and what is the evolution of alternative investments for the future?

The beginnings of alternative investing

An alternative investment is loosely defined as any financial investment excluding stocks, bonds or instruments related to cash. Some alternative investments have been around for centuries. The first form of commodity trading is born between 4500 BC and 4000 BC. In fact, these commitments with stipulations of time and date of delivery look a lot like a modern futures contract.

Private art sales date back to Roman times, while the Stockholm Auction House – the world’s oldest auction house – was opened in 1674. One of the most popular speculative bubbles in history arose from the trade in rare Dutch tulips during the 1600s. At its peak, bulbs were trading for as many as six times the average annual salary of a person. As early as 1787, the writings of Thomas Jefferson provided the first evidence that premiums have been invoiced for older vintages. If we are talking about collectibles, then you cannot forget about baseball cards. Non-traditional tradable items called cabinet cards were produced in the mid-19th century, although the “golden era” of baseball cards was believed to be started in 1909.

While the above alternative investment vehicles are fun, the more traditional and structured financial mechanisms have a much shorter history. The first private family office (The Bessemer Trust) was founded in 1907. Andrew Winslow Jones is credited with developing the first hedge fund in 1940. Less than 10 years later, the first private venture capital firms were formed. Although land ownership and real estate have a rich history as a part of society, America’s first REIT was not created until 1960.

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Becoming important

The alternative investment industry has developed in a number of ways. First, more investors and businesses are getting involved than ever. In 2020, a survey of high net worth individuals revealed 87% planned maintain or increase their allocation to alternative assets over the next twelve months. The number of institutions invested in private equity in 2015 was 6,170; today there is more than 8,400 companies implied. Almost 1,800 fund managers hold private debt, more than twice as many as just five years ago. Real estate assets under management hit a record $ 992 billion during the summer of 2019 – marking the fourth consecutive annual increase in assets under management for the industry.

In addition to the volume of alternative investments, history is being made every day in the space of alternative assets from single transactions. In July 2021, the sale for $ 870,000 of a sealed copy of THE Legend of Zelda broke the record for the most expensive video game ever sold. Two days later, a sealed copy of Super Mario 64 sold for $ 1,560,000. Also earlier this year, the sale of Beeple’s Magnum Opus for $ 69.3 million was the third highest auction price made by a living artist ever. Don’t forget the vintage cars – the most expensive McLaren F1 ever was sold earlier this year also.

A hint of devolution

As alternative investments change and evolve, not all aspects of these opportunities are positive. The 2017 Tax Cuts and Jobs Act removed long-standing benefits for collectible investors. The tax law now has deductible expenses prohibited and similar exchanges on collectibles. Intermediaries are also increasing fees in response to increased demand. Christie’s Auction House raised premiums for art buyers three times between 2016 and 2019, while Sotheby’s implemented a new “Overhead Premium” charge of 1% on all sales from last year. Although used by many as a transaction currency, the cryptocurrency law provides for rates of appreciation of up to 20%. The IRS currently holds the position of immediate tax recognition of staking rewards – even though the cryptocurrency has won has not yet been sold.

In addition, not all areas of alternative investments continue to grow. Although hedge funds rebounded in 2021, around 11,600 hedge funds closed between 2008 and 2020. An estimated $ 58.76 billion has been withdrawn from industry investors, with nearly $ 10 billion has been withdrawn hedge funds in December 2020 alone. Precious metals have not performed well lately either. At the time of this writing, the price of an ounce of gold has fallen 10.45% over the past year. Although generally used as a hedge against inflation, precious metal prices are under pressure due to a stronger than expected job market as well as continued demand for the US dollar.

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The era of democratization

We can already see what the future of alternative investments looks like, and it is the universal democratization of opportunities. Through the use of technology, investors can avoid high barriers to entry or large capital requirements to get involved in the assets they believe in. Formerly limited to certain parties, platforms for investing in music royalties as Royal Exchange allow public lists of royalties to be sold. You don’t have a wine cellar or are you worried about the physical maintenance of your alcohol investment? Vinovest acquires, stores and ships investments in wine. It currently offers early access to new investment opportunities via its new WhiskeyVest platform. Finally, non-institutional investors now have access to private equity offers via Republic, a fintech investment platform.

Another evolving trend in the world of alternative investments is tokenization. Tokenization is the act of breaking a large enough investment into digestible chunks for small investors. Also called fractionation, this process made it possible to produce Andy Warhol’s “14 Small Electric Chairs”. legally divided into digital tokens, each token representing partial ownership of the artwork. Brooklyn Nets point guard Spencer Dinwiddie symbolized his NBA contract – allowing him to receive his contract three years in advance and allowing investors to have an investment backed by the obligations of an NBA contract that would pay over several years. Numerous commercial real estate marketplaces like Red Swan require a minimum investment of approximately $ 1,000; investors can then choose between real estate opportunities across the country in which to invest. While alternative investments were previously exclusive, there is now a minimal monetary barrier to entry to owning a portion of something great.

The future of alternative investments

On the one hand, alternative investments have been around for centuries. On the other hand, Barack Obama was sworn in as the 44th President of the United States just 17 days after the creation of the Bitcoin network. New non-traditional investments are created every day, building on traditional opportunities with a rich history by integrating innovative future applications. For the investor looking to diversify his portfolio, it is an exciting time to be a part of this stage in the evolution of alternative investing.

Related: The growth of sustainable investment

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