In recent years, alternative investments have become increasingly accessible to a broader range of investors. Once reserved for high-net-worth individuals and institutional investors, alternative assets now play a pivotal role in modern portfolios, offering diversification and potential for higher returns while reducing overall risk.

If you’re looking to expand your investment strategy, understanding alternative investments is key. This guide will introduce you to alternative assets, explain how they work, and highlight the benefits of integrating Mortgage Investment Corporations (MICs) into your portfolio for enhanced tax efficiency and consistent returns.

Key Takeaways:

• Alternative investments provide diversification beyond traditional stocks and bonds, reducing portfolio risk and enhancing resilience during market downturns.
• These investments offer potential benefits such as higher returns, reliable income streams, and protection against inflation.
• Working with expert fund managers is essential to navigating the higher risks and illiquidity that often accompany alternative assets.

What Are Alternative Investments?

Alternative investments are financial assets that fall outside traditional markets like stocks, bonds, or cash. These assets are typically less correlated with public markets, which makes them valuable for diversifying portfolios and reducing risk, particularly in volatile market conditions. Some of the most common alternative investments include private equity, real estate, hedge funds, and commodities.

What sets alternative investments apart is their structure and performance drivers, which differ from traditional investments. These assets are often less liquid, meaning they cannot be quickly converted to cash. They also typically employ unique strategies and offer access to specialized markets that are not available through public exchanges.

How Do Alternative Investments Work?

Each type of alternative investment has its own set of characteristics, providing investors with diverse opportunities. Generally, these investments allow you to put your money into assets beyond the typical stocks and bonds. Whether you’re seeking growth or steady income, alternative investments can cater to different investor needs.

Benefits of Alternative Investments

1. Higher Potential Returns
   One of the key advantages of alternative investments is the potential for higher returns. By tapping into niche and emerging markets, such as private equity or real estate, these assets can outperform traditional investments. For example, the Amur Capital Income Fund (ACIF) has historically delivered better returns than stocks and bonds over the years.
2. Portfolio Diversification
   Including alternative investments in your portfolio enhances diversification, which helps reduce overall risk. These assets are often unaffected by the volatility of traditional markets, providing a steady source of income even during market downturns. This type of diversification can strengthen your portfolio against significant losses.
3. Reliable Income Stream
   Certain alternative investments, like Mortgage Investment Corporations (MICs), generate stable cash flows through income from loans. These typically come in the form of dividends, offering investors a predictable income stream. Because these investments are spread across different real estate markets, they also provide further diversification.
4. Hedge Against Inflation
   Traditional portfolios, especially those reliant on stocks and bonds, are often vulnerable to inflation. As prices rise, purchasing power declines, which can hurt stock market performance. In contrast, real estate investments and other tangible assets tend to appreciate with inflation, providing a natural hedge. Property values often increase during inflationary periods, driven by higher construction costs and limited supply.

Potential Drawbacks of Alternative Investments

1. Barriers to Entry
   Some alternative investments, such as hedge funds or private equity, require higher minimum investments than traditional assets. These assets can also come with higher management fees, as they often require more complex strategies and oversight.
2. Illiquidity
   Most alternative investments are less liquid than traditional assets like stocks and bonds. Since they are not traded on public exchanges, they can’t be easily sold or converted into cash. This makes them a better fit for investors who have a longer time horizon and can tolerate waiting for returns.
3. Higher Risk
   Alternative investments are not without risk. For example, hedge funds and venture capital funds may have less transparency about their holdings and valuations, adding an element of uncertainty. As with any investment, conducting thorough research and working with experienced fund managers is essential.

Types of Alternative Investments in Canada

1. Private Equity
   Private equity involves investing in private companies with the goal of improving their operations and selling them for a profit. This can include venture capital, which focuses on startups, growth equity for expanding businesses, and buyouts of mature companies.
2. Hedge Funds
   Hedge funds are pooled investment vehicles that use various strategies to generate returns. These funds can invest in a wide range of assets, including stocks, bonds, and derivatives. Common strategies include global macro (betting on global economic trends) and event-driven (capitalizing on corporate events like mergers).
3. Commodities
   Commodities include natural resources such as oil, gold, and agricultural products. These investments tend to follow supply and demand trends rather than the broader stock market, meaning they can generate profits when demand increases.
4. Real Estate Investment Trusts (REITs)
   REITs allow investors to gain exposure to real estate markets without directly owning physical properties. These funds pool capital to invest in income-generating real estate, such as apartments, office buildings, and shopping centers. REITs provide investors with regular income through dividends while diversifying exposure across different property types.
5. Mortgage Investment Corporations (MICs)
   MICs pool funds from investors to finance mortgages. Investors in MICs receive regular income through mortgage interest payments. Unlike REITs, which focus on property ownership, MICs invest only in mortgages, making them a less risky option compared to physical real estate ownership. Since mortgages are secured against collateral, they offer a more predictable and stable income stream.

The Role of Alternative Assets in Your Portfolio

Alternative investments should be viewed as complements to traditional investments like stocks and bonds. Instead of choosing one over the other, investors should aim for a balanced mix of asset types to improve diversification and protect against risks during economic downturns. By incorporating alternative assets into a well-rounded portfolio, you can maximize your investment potential.

Are Alternative Investments a Good Idea?

Alternative investments offer significant benefits, including lower volatility, higher returns, and better diversification. However, they also come with higher risks, illiquidity, and barriers to entry. With careful planning and proper research, alternative assets can be a valuable addition to your investment strategy.

Why Consider MICs Over Other Investments?

Unlike traditional investments such as stocks and bonds, MICs offer the potential for better risk-adjusted returns. Amur Capital’s MIC funds are designed to suit various investor risk profiles, from conservative to high-growth strategies. Additionally, MICs provide stability, with predictable monthly dividends, unlike the more volatile returns seen with hedge funds or private equity investments.

MICs also offer a unique advantage over REITs in that they focus on lending and earning interest on mortgages, rather than owning and managing properties. This gives investors easier access to real estate market returns with less exposure to property risks.