The development of alternative investments

The opinions of entrepreneurs’ contributors are their own.

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 know from the title of this article that these are all alternative investments, you are correct. All of these are – or have been – successful investment opportunities. Each article has rewarded savvy investors who have dared to invest their money in non-traditional assets as opposed to stocks or bonds.
How did this alternative market come about and how does the development of alternative systems look for the future?

The beginnings of alternative investing

An alternative investment is broadly defined as any financial investment other than stocks, bonds, or cash-related instruments. Some alternative investments have been around for centuries. The earliest form of trade in goods originated between 4500 BC. BC and 4000 BC In fact, these time and date delivery obligations are very similar to a modern futures contract.

Private art sales date back to Roman times, while the Stockholm Auction House – the world’s oldest auction house – opened in 1674. One of the most popular speculative bubbles in history arose from the trade in rare Dutch tulips in the 17th century. At its peak, bulbs were trading for six times the average annual wage. As early as 1787, the writings of Thomas Jefferson provided the first indications that premiums were being raised for older vintages. When we talk about collectibles, don’t forget baseball cards. In the mid-19th century, non-traditional commercial products called cabinet cards were made, although the “golden era” of baseball cards is said to have begun in 1909.

While the alternative investment vehicles mentioned above are fun, 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 founded. Although land ownership and real estate have a rich history as part of society, the first US REIT wasn’t established until 1960.

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Rise to notoriety

The alternative investment industry has grown in a variety of ways. First, more investors and companies are getting involved than ever before. In 2020, a survey of high net worth individuals found that 87% plan to maintain or increase their allocation to alternative investments over the next twelve months. In 2015, 6,170 institutions were invested in private equity; today over 8,400 companies are involved. Almost 1,800 fund managers hold private debt – more than twice as many as five years ago. Real estate assets under management rose to a record $ 992 billion in the summer of 2019 – the fourth consecutive annual increase in AUM for the industry.

In addition to the volume of alternative investments, history is made every day in the area of ​​alternative assets from individual transactions. In July 2021, a sealed copy of The Legend of Zelda worth $ 870,000 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 ever made by a living artist. Don’t forget the collector’s vehicles – the most expensive McLaren F1 of all time was also sold earlier this year.

A touch of devolution

As alternative investments change and evolve, not all aspects of these opportunities are positive. The Tax Cuts and Jobs Act of 2017 removed long-term benefits for collectible investors. The tax law has now banned deductible expenses and the exchange of similar types of collectibles. The intermediaries are also increasing their fees in response to increasing demand. Christie’s auction house increased art buyers’ premiums three times between 2016 and 2019, while Sotheby’s introduced a new fee of 1% on all sales starting last year. Although it is used by many as a transactional currency, cryptocurrency law requires capital gains rates of up to 20%. The IRS currently has the position of immediate income tax recognition of staking rewards – even if the cryptocurrency earned has not yet been sold.

In addition, not all areas of alternative investments continue to grow. Although hedge funds recovered in 2021, around 11,600 hedge funds closed between 2008 and 2020. An estimated $ 58.76 billion has been withdrawn by investors in the industry, with nearly $ 10 billion withdrawn from hedge funds in December 2020 alone. Precious metals have also not performed well recently. At the time of writing, the price of an ounce of gold was down 10.45% year over year. While precious metals prices are typically used as an inflation hedge, they are coming under pressure due to a stronger-than-expected labor market and continued demand for the US dollar.

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The age of democratization

We are already seeing what the future of alternative investments looks like, namely the universal democratization of opportunity. By using technology, investors can avoid high barriers to entry or significant capital requirements in order to participate in the assets they believe in. Once restricted to specific parties, music license investment platforms such as Royal Exchange allow public lists of license fees for sale. Don’t have a wine cellar or are you worried about the physical maintenance of your alcohol investment? Vinovest acquires, stores and ships holdings in wine. It currently offers early access to new investment opportunities through its new WhiskyVest platform. After all, non-institutional investors now have access to private equity offerings through Republic, a fintech investment platform.

Another emerging trend in the alternative investment world is tokenization. Tokenization is the act of breaking up a pretty large investment into digestible chunks for smaller investors. This process, also known as fractionation, made it possible to legally divide Andy Warhol’s “14 Small Electric Chairs” into digital tokens, with each token representing part ownership of the work of art. Spencer Dinwiddie, a point guard for the Brooklyn Nets, symbolized his NBA contract – this allowed him to collect his three-year contract in advance and give investors a bond-backed investment of an NBA contract that would pay off over several years. Numerous commercial real estate marketplaces such as Red Swan require minimum investments of around $ 1,000; Investors can then choose between properties across the country to invest in. While alternative investments used to be exclusive, there is now a minimal monetary barrier to owning a part 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 Bitcoin network was founded. Every day new non-traditional investments are created that build traditional opportunities with a rich past by incorporating innovative future applications. It is an exciting time for investors looking to diversify their portfolio to participate in this phase of alternative investment development.

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