In the modern world, people have received extensive opportunities for investment and multiplying their income. But what assets are people investing in? As a rule, these are traditional assets – stocks, bonds, currencies, etc. However, in addition to this, there are so-called alternative asset investments. In this article, we will highlight the best alternative options available to private investors and tell what tokenization has to do with alternative asset investments.
What are alternative asset investments?
Let's dive deeper into the alternative investment industry. An alternative investment is an investment in financial assets that are not classified as traditional (stocks, bonds, cash, etc). Alternative investments include private equity, venture capital, hedge funds, managed futures, or collectibles. Also, such instruments include commodity assets, investments in real estate, and some other investment types.
Alternative assets cover a wide range of investments with unique characteristics. Many of them are becoming more and more accessible to private investors. They have several key characteristics:
- The US Securities and Exchange Commission (SEC) does not regulate such assets.
- They may have liquidity problems. For example, real estate cannot be sold as quickly and easily as company shares.
- Alternative asset investments have a low correlation compared to traditional investment assets. This means that their rate does not always depend, for example, on the stock market.
Main types of alternative asset investments
Alternative investments are a fairly broad class of assets. Below we will describe the main seven types of such assets.
Private equity refers to assets that refer to capital investments in private companies or organizations whose shares are not traded on a stock exchange. There are three types of such capital:
- Venture capital is focused on startups.
- Growth capital is focused on more mature companies and business expansion.
- Buyout is a direct purchase of a business.
Such investments can be a good option for people with significant sums of money, as the threshold for entry is quite high. However, it is important to remember the risks, especially for startups.
Private debt is an investment that is not financed by banks and is not traded on foreign markets. For example, we are talking about loans made by private companies. It is used when companies need additional funds for development.
Companies that provide such capital are called private debt funds. They earn by getting interests and payouts of the original loan.
A hedge fund is a special fund that trades relatively liquid assets. Such a fund can use various strategies to increase a client's capital. Hedge funds can work with stocks, arbitrage volatility, and so on.
Hedge funds are available to institutional investors. Pension funds, mutual funds, or wealthy private investors can invest in them.
Investing in real estate can take many forms. Such investments can be conditionally divided into three types:
- Investments in land and agricultural land.
- Investments in residential real estate.
- Investments in commercial real estate.
Real estate has characteristics similar to bonds. The owners profit from the tenants and can also sell their properties if the price rises. However, the main problem of real estate is a very high price and low liquidity. It is quite difficult to sell it; if there is no tenant, the property will not bring income, so the investor will suffer losses.
Commodities are also classified as alternative assets. These goods have been traded for over 1000 years. You can work with real assets or with futures. Conventionally, commodities can be divided into three groups:
- Agricultural products and food.
- Energy carriers (oil, gas, coal).
- Precious metals (gold, silver, platinum, etc.).
Commodities are considered a hedge against inflation because the stock markets do not heavily influence them. The cost of commodities rises and falls following the level of supply and demand.
Collectibles and luxury items include a very wide range of investment items. These are:
- Vintage wines;
- Rare cars;
- Art objects;
- Baseball cards, etc.
Investing in such objects means acquiring and maintaining them until their value rises sufficiently. After that, the investor sells them and makes a profit. However, the risk in such investments is very high since many factors can lead to the absence of the expected price growth or even to a reduction in the asset price.
Structured products involve investments in fixed-income instruments. As a rule, these are derivatives or securities, the price of which is determined by the underlying assets. Such products include credit default swaps (CDS) and collateralized debt obligations (CDOs).
Structured products are a rather complex and risky investment product, but the choice here is quite wide. Most often, structured investment products are created by banks and offered to hedge funds and institutional or private investors.
Structured products are a relatively new type of instrument, having become popular before the global financial crisis of 2007-2008 when mortgage-backed CDOs gained immense popularity. However, after the collapse of the "mortgage bubble," investors suffered heavy losses.
What about tokenized assets?
All alternative asset investments that exist today can be tokenized. Many companies looking to raise capital from a wide range of investors are tokenizing their assets to do so. The essence of tokenization is the transfer of real assets to the blockchain and the issuance of the corresponding tokens. These can be either security tokens or NFTs. All information is securely stored on the blockchain and cannot be deleted or changed. This provides protection for investment assets.
Asset tokenization has many benefits. The main ones are as follows.
- Possibility of fractional ownership. For example, if a property is too expensive for a private investor, thanks to tokenization, they can buy a share of it. At the same time, the investor gets a guaranteed share of the income from the rent, as well as from the possible sale of real estate.
- Possibility of selling assets by units. You can tokenize a barrel of oil or an ounce of gold and sell them using security tokens.
- Ability to own unique assets. This is especially important for works of art that are transferred into NFT. For example, the Morons painting by the famous American artist Banksy exists only in NFT form. Its physical version was bought, tokenized, and destroyed, so the masterpiece exists only in a virtual format.
- Ease of investment. To invest in alternative instruments through the security tokens or NFTs, you do not need to draw up a large number of documents, arrange conditions for storing any objects or spend money on repairs or restoration.
- The convenience of purchase. You can buy a security token during the STO. NFTs are sold on special alternative investment platforms. An investor doesn't have to leave their home to become an owner of an asset.
Thus, security tokens and NFTs are relatively new and rapidly developing technologies of great interest to investors. First of all, private investors should consider security tokens for diversifying their portfolios. If your company wants to tokenize assets to raise more capital and become one of the first companies leveraging Web 3.0, we would be happy to advise you. Stobox has extensive experience in tokenizing various assets and attracting investors for our clients. Contact us today!