Alternative Investments I – What Are They?

Wealthy investors in wealth categories II through IV (see our article “What Category of Wealth Do You Have?”)  utilize investment products and strategies about which the rest of us know little, or in which we aren’t legally eligible to participate. These alternative products are typically used to provide more diversity in a portfolio.

Most of these alternative types of investments carry more risks than stocks, bonds or cash investments. If you are interested in pursuing these investment types, be sure to consult a professional advisor.

Definition.

Investopedia defines an alternative investment as “An investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts. “

The SEC definition of an accredited investor is quoted below:

“The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. a bank, insurance company, registered investment company, business development company, or small business investment company;

2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

3. a charitable organization, corporation, or partnership with assets exceeding $5 million;

4. a director, executive officer, or general partner of the company selling the securities;

5. a business in which all the equity owners are accredited investors;

6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. “

Read about some examples of alternative investments such as futures, structured products, warrants and collectibles like wine and vintage automobiles in our article Alternative Investments – What are some examples?. http://familymoneyvalues.com/2010/11/alternative-investments-what-are-some-examples/

Sources:

Investopedia Web site: http://www.investopedia.com/terms/a/alternative_investment.asp Securities and Exchange Administration Web site: http://www.sec.gov/answers/accred.htm

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