Beyond the classic shares and bonds traded on public exchanges lies a whole world of alternative investments — assets that are not publicly traded and that attract growing attention from investors. Behind the impressive label, however, sit risks, costs and complexity that are worth understanding before committing anything.
This guide explains what alternative investments are, which types exist, the advantages and drawbacks, and above all who they suit and who they do not. Plainly, and without promises of returns.
Disclosure: This information is provided as an educational aid only and does not constitute investment advice. Alternative investments carry risk, usually high, and low liquidity. Any action you take is your own responsibility.
What an alternative investment is
An alternative investment is, simply, any asset class that is not one of the traditional publicly traded holdings — shares, bonds and cash. Instead these are generally non-tradable assets, or tradable only in a limited way, whose access and pricing work differently from a stock exchange.
Most alternative investments share a set of characteristics: low liquidity, meaning it is hard to get your money out quickly; a high minimum investment; lower transparency; and in many cases availability only to "qualified investors" holding capital above a regulatory threshold. On the other side of the ledger, they may add diversification to a portfolio and reduce its dependence on the equity market.
The main types
The field is broad. Among the more common routes:
Real estate — direct investment in property, or exposure through real estate funds. One of the oldest and best-established alternative routes in Israel.
Hedge funds — actively managed funds using sophisticated strategies. High minimum investment.
Venture capital and private equity — investment in private companies, whether startups or mature businesses, that are not listed on an exchange.
Debt and lending funds (P2P) — extending credit to businesses or individuals in exchange for interest.
Commodities — gold, oil, metals and agriculture, often held as a hedge against inflation.
Tangible assets — art, wine, collectibles. Niche routes carrying their own particular risks.
Crypto — digital assets. Highly volatile and risky, and not suitable for everyone.
Advantages and drawbacks
| Advantages | Drawbacks |
|---|---|
| Diversification, less dependence on equity markets | Low liquidity — hard to withdraw money |
| Return potential uncorrelated to the exchange | High costs and high entry thresholds |
| Possible inflation protection (commodities, property) | Opacity and complexity — hard to evaluate |
| Access to unique assets | High risk; some restricted to qualified investors |
Who they suit — and who they do not
The bottom line: alternative investments mainly suit experienced investors who already hold an established core portfolio, have a long time horizon, and can absorb both risk and illiquidity. They can serve as a small complementary component of a portfolio — never as its foundation.
For beginners, or for anyone still building a core portfolio, the correct approach is the reverse. Establish a simple, diversified, low-cost index-based portfolio first — see investments and index funds and ETFs — and only later, and cautiously, consider an alternative component. The rule: never put money into an alternative investment that you might need, or that you cannot afford to lose.
How to incorporate alternatives sensibly
If you do decide to include them, a few principles of caution apply. Start small, as a minor share of the portfolio. Understand thoroughly what you are buying — if you cannot explain the product, that is a warning sign rather than a reason to trust the manager. Check costs and liquidity terms before entering, not after. And diversify within the alternative component too. Diversification is a central principle in any portfolio, and it does not stop applying here.
Common mistakes
1. Allocating too much. This is a seasoning, not the main course.
2. Being drawn in by return promises. Low liquidity and low transparency are fertile ground for claims that are never tested against a public price.
3. Ignoring the costs. High management fees and entry thresholds erode returns quietly.
4. Buying what you do not understand. Complexity is not a guarantee of return.
5. Skipping the core portfolio. An alternative allocation does not substitute for a cheap, diversified base.
Summary
Alternative investments are a legitimate diversification tool — but not magic, and certainly not a shortcut. They suit an investor who has already built a stable base, understands the risks, and can afford to lock money away for years. For anyone at the start of the journey the priority is clear: a simple, low-cost core portfolio first, and alternatives later, carefully.
For the fundamentals see investments, building an investment portfolio, and the guide to compound interest. We provide the knowledge — the decisions remain yours.
The information on this page is for educational purposes. Please consult a professional before making financial decisions.
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