For decades, traditional investment vehicles like stocks, bonds, and mutual funds were seen as the primary paths for retail investors to grow their wealth. However, in recent years, alternative investments – assets that fall outside of these traditional categories – have been gaining traction, attracting interest from investors of all ages and portfolios.
This shift towards alternative investing may be driven by a combination of regulatory changes, evolving investor preferences, technology advancements and the pursuit of portfolio diversification. In this blog post, we explore the trends driving the overall industry swing towards alternatives and the rise of alternative investing.
The allure of alternative investments, such as venture capital, private equity, real estate, and hedge funds, has been steadily gaining momentum, particularly among younger investors. Alternatives have emerged as a compelling avenue for diversification and potential high growth, stemming from what appears to be a lack of trust in traditional investment options[1].
Trends Driving Alternative Investments
Portfolio Diversification
One of the key trends driving the rise of alternative investments is the desire for portfolio diversification. Modern investors are increasingly aware of the limitations of traditional investment vehicles and the need to diversify their portfolios to help mitigate risk. Alternative investments can offer a way to achieve this diversification by providing exposure to asset classes that are not correlated with the broader stock and bond markets. This can help investors mitigate risk and potentially contribute to their overall portfolio performance.
Technology Advancements
The rapid advancement of technology has also played a role in democratizing access to alternative investments. Platforms like MicroVentures provide individual investors with opportunities to participate in alternative investment offerings with the click of a mouse or a tap on a phone. Through online investment platforms, investors can now browse through a variety of alternative investment opportunities, conduct due diligence, and make investment decisions with greater ease and transparency.
Regulatory Changes
In addition to changing investor preferences and technological advancements, regulatory changes have also helped play a role in fostering the growth of alternative investing. The Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, marked a significant milestone in the regulatory landscape by easing certain restrictions on capital formation for small businesses and startups. Title II of the JOBS Act lifted the ban on general solicitation and advertising for some private placements, opening up new avenues for companies to raise capital and for accredited investors to access a broader range of investment opportunities.
Increasing Access
Subsequently, Title III of the JOBS Act introduced the concept of equity crowdfunding, allowing non-accredited investors to participate in private company investments through registered online platforms. This regulatory change has helped empower a new wave of investors to explore alternative investments and participate in the growth of early-stage companies, thereby fueling innovation and economic growth[2].
The evolution of regulation crowdfunding (Reg CF) has further broadened the accessibility of alternative investments by allowing for individual investors to support early-stage companies and startups with relatively small amounts of capital. This regulatory framework has not only provided new opportunities for investors but has also served as a catalyst for entrepreneurship and innovation, as companies can now access a wider pool of potential investors to help fuel their growth and development.
Key Considerations
As the alternative investment landscape continues to evolve, it may be important for investors to approach these opportunities with a comprehensive understanding of the associated risks and rewards. Alternative investments often exhibit unique characteristics, including illiquidity, higher volatility, and a longer investment horizon, which require a thoughtful and strategic approach to portfolio construction and risk mitigation. Investors may want to conduct thorough due diligence, seek diversification across different alternative asset classes, and carefully assess the alignment of alternative investments with their overall investment objectives and risk tolerance.
Final Thoughts
The rise of alternative investments has represented a paradigm shift in the investment landscape, driven by changing investor preferences, technological advancements, and regulatory changes that have helped expand access to investment opportunities. As the industry swings towards alternatives, it may be important for investors to stay informed about the trends shaping the market and the regulatory developments that are shaping the future of alternative investing.
Want to learn more about alternative investing? Check out the following MicroVentures blogs to learn more:
Want to add startups to your alternative investment portfolio? Sign up for a MicroVentures account to start investing!
[1] https://www.usatoday.com/story/special/contributor-content/2023/08/04/why-gen-z-is-ditching-the-market-in-favor-of-alternative-investments/70532356007/
[2] https://www.startups.com/library/expert-advice/american-jobs-act-title-iii-crowdfunding
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
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