There is another asset called alternative investment which is not the same as some common conventional investment types, such as stocks, bonds, and cash. Alternative assets allow high net worth investors to put their money into private equity, hedge funds, futures, real estate, commodities, and derivatives. These assets have high minimum investments and fee structures, compared to mutual funds and ETFs. In addition, alternatives have low liquidity than most of the common investment assets.
The advantages of alternative assets are lower transaction fees and tax rates since they have lower turnover levels and longer holding periods. On the other hand, leverage is also a critical characteristic of alternative assets. Chasing higher rate of return is why the leverage is created. The positive side of alternative investment is the low correlation with those of standard asset classes - which makes them suitable for portfolio diversification. Due to this, many large institutional funds such as pensions and private endowments have begun to allocate a small portion of their portfolios, typically less than 10%, to alternative investments such as hedge funds. Investments in hard assets such as gold and oil also provide an effective hedge against rising inflation, as they are negatively correlated with the performance of stocks and bonds.
The higher the return on an investment, the higher the risk. Leverage helps investors gain more money in the marketplace but for significantly higher risk. Fund managers and professional investors use other strategies as well including hedge products. These are usually intended to behave differently from the share markets of the world which can protect investors when there is a downturn in the market. Equally so, investors who use hedge products will not get all the gains as the markets continue to rise.