There are two key strategies when it comes to investing in alternative assets: capital appreciation and income generation. Both strategies apply to opportunities outside of traditional asset classes, but they differ in investment philosophy and expected outcomes.
When referring to capital appreciation, we mean the long-term investment strategies where investors acquire securities with the intention of holding them for an extended period. Real estate, private equity and artwork are often associated with this type of approach, as the primary objective is to have capital appreciate over time.
This strategy aims for investors to benefit from the potential growth and value appreciation of the asset. A patient mindset is vital, as it may take several years for the investment to yield a favorable return. Like traditional markets, investors also need to do their due diligence to ensure their investment(s) have strong fundamentals, growth potential and the ability to weather market volatility.
On the other hand, income generating alternative investments focus on providing investors with regular cash flow in addition to potential capital appreciation. Cash flow is emphasized, however, as these investment vehicles are designed for investors seeking a steady stream of income overtime. Some examples of alternative income generating assets include rental properties, private credit and music royalties.
The distinguishing feature of income stream options is their ability to generate ongoing cash flow, which can either supplement or even fully replace traditional income sources. Investors seeking regular cash distributions and ways to diversify their income streams may be more attracted to this approach. However, it’s also essential to carefully assess the risks and potential returns with this type of investment, as income streams can and likely will fluctuate based upon market conditions and underlying asset performance.
In the alternative asset space, options are nearly endless. With so many available opportunities, investors have the ability to deploy capital appreciation strategies, or seek steady yield oriented investments to generate cash flow. By understanding the nuances of each approach and what goes into creating a successful outcome, investors can create strategies that align with their specific goals and better diversify their portfolios.