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What do tulips, a bottle of whiskey, Super Mario 64, and a futuristic real estate development project have in common?
If you were smart enough to guess from the title of this article that these are all alternative investments, you would be correct. All of these are – or were – successful investment opportunities. Each component has rewarded smart investors who dared to invest their money in unconventional investments rather than stocks or bonds.
How did this alternative market arise, and what does the development of alternative investments hold for the future?
Early days of alternative investing
Alternative investment is loosely defined as any financial investment except for stocks, bonds, or cash related instruments. Some alternative investments have been around for centuries. The first form of commodity trading arose between 4500 BC and 4000 BC. In fact, these commitments in terms of the time and date of delivery are very similar to a modern-day forward contract.
Sales of private artworks date back to Roman times, while the Stockholm auction house – the world’s oldest auction house – opened in 1674. One of history’s most famous speculative bubbles arose from the trade of rare Dutch tulips during the 17th century. At their peak, bulbs traded for up to six times a person’s average annual salary. As early as 1787, the writings of Thomas Jefferson provided early evidence of premiums being imposed on old wines. If we’re talking about collectibles, you can’t forget about baseball cards. Funky trade tools called treasury cards were produced in the mid-1800s, although the “golden age” of baseball cards began in 1909.
While the above alternative investment tools are fun, traditional and regulated financial mechanisms have a much shorter history. The first private family office (The Bessemer Trust) was established 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 formed. Although land and real estate ownership has a rich history as part of a community, the first American real estate investment trust wasn’t established until 1960.
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Rise to the fore
The alternative investment industry has grown in many ways. First, more investors and companies are getting involved than ever before. In 2020, a survey of high net worth individuals found that 87% were planning to maintain or increase their allocation to alternative assets over the next 12 months. The number of institutions investing in private equity in 2015 reached a total of 6,170 institutions; Today, there are more than 8,400 companies involved. Nearly 1,800 fund managers own private debt — more than double that number just five years ago. Real estate assets under management rose to a record high of $992 billion during the summer of 2019 – marking the fourth consecutive annual increase in assets under management for the industry.
In addition to the volume of alternative investments, history is made every day in the alternative asset space of individual transactions. In July 2021, $870,000 was sold for a sealed copy of the legend of zelda It 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, Beeple’s Magnum Opus sold for $69.3 million, the third highest auction price ever achieved by an artist. Don’t forget the collectibles – the most expensive McLaren F1 ever went on sale earlier this year, too.
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 code now prohibits deductible expenses and similar exchanges on collectibles. Brokers are also increasing fees in response to high demand. Christie’s Auctions raised premiums for artwork buyers three times between 2016 and 2019, while Sotheby’s applied a new 1% “extra premium” fee to all sales that began last year. Despite being used by many as a transaction currency, the cryptocurrency law calls for capital gain rates as high as 20%. The IRS currently maintains an immediate income tax recognition status for reward staking — even if the earned crypto has not yet been sold.
In addition, not all areas of alternative investments continue to grow. Although hedge funds rebounded in 2021, nearly 11,600 hedge funds closed between 2008 and 2020. An estimated $58.76 billion was withdrawn from industry investors, with nearly $10 billion withdrawn from hedge funds in December 2020 alone. Also, precious metals have not been doing well lately. At the time of writing, the price of one ounce of gold is down 10.45% from last year. Although precious metals prices usually flow as a hedge against inflation, precious metals prices are under pressure due to a stronger-than-expected labor market as well as continued demand for the US dollar.
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era of democratization
We are already seeing what the future of alternative investments will look like, a global democratization of opportunity. Through the use of technology, investors can avoid high barriers to entry or large capital requirements to engage in the assets they believe in. Once music equity investment platforms such as the Royal Exchange are limited to some parties, they allow the listing of equity for public sale. You don’t have a wine cellar, or are you worried about the physical maintenance of your alcohol investment? Vinovest acquires, stores and ships the wine investment. It is currently offering early access to new investment opportunities via its new WhiskeyVest platform. Finally, non-institutional investors can now access private equity offerings through Republic, a fintech investment platform.
Another developing trend in the world of alternative investments is coding. Coding is the process of dividing a fairly large investment into parts that are understandable to the smallest investors. Also referred to as fragmentation, this process allowed “14 Small Electric Chairs” by Andy Warhol to be legally split into digital tokens, with each token representing partial ownership in the artwork. Brooklyn Nets point guard Spencer Dinwiddie tokenized his NBA contract — allowing him to cash out his three-year contract up front and allowing investors to get a bond-backed investment of an NBA contract that would pay off over several years. Many commercial real estate markets such as Red Swan require a minimum investment of around $1000; Investors can then choose between real estate opportunities across the country to invest in. Whereas alternative investments were once exclusive, there are now minimal monetary barriers to entry to owning a piece 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 creation of the Bitcoin network. New unconventional investments are created every day, building traditional opportunities with a rich past by incorporating innovative future applications. For an investor looking to diversify their portfolio, it’s an exciting time to be a part of this stage in the evolution of alternative investing.
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