Investing in Real Asset and Alternative Investment - Assignment Example

Real assets are physical and tangible assets that have an intrinsic value i.e. underlying perception of the true value of an asset, the value is normally influenced by the asset utility level. Some of the real assets include precious metals like gold, real estate, and oil.

 Advantages of real assets

One of the features that make real assets to be advantageous and best when it comes to investing, is the fact that it has a lower correlation as compared to other securities like bonds and shares. This feature makes the value attached to the real asset to be much more stable. The value attached to bonds and shares keeps on fluctuating thus been difficult to be certain of its value. Real assets lower the risks of a portfolio and are able to guarantee better returns in the future.

Real assassetset provide diversification opportunities in investment. According to (Brigham & Houston, 2001) the value attached to real assets is a bit stable putting it in the investment portfolio along with shares diversification on the portfolio is achieved. This help in case the value of shares dwindles then one is able to still get returns from the real assets.

Disadvantages of real assets

The cost of maintaining real assets makes it expensive. The real asset needs to have insurance coverage against possible risks. This additional expense makes it too expensive to invest in as compared to bonds and shares don’t have such additional expenses.

The unit cost of any real asset is expensive thus limiting the number of people who can invest in these assets. Unit cost of share is normally lower and a good number of people can afford to invest in them.

Alternative investment

This form of investment is different from the common traditional way of investment i.e. cash, bonds, and shares (Hirt & Block, 2012). This form of investment includes hedge funds, real estate, private equity, exchange funds, and managed futures. This form of investment doesn’t have a fixed income. Alternative investment is less transparent and complex this feature makes it difficult for less trained investors because of its complexity in restrictions.

Alternative investment has the capability to improve the risk and return trade-off. The low correlation between the alternative investment and the conservative known form of investment enhances the diversification of the portfolio thus reducing the risk associated.

Another characteristic that makes alternative investment able to diversify the portfolio to reduce risks is the ability to be more flexible enabling an investor to invest in a set of opportunities that can give better returns.

Private equity is a form of alternative investment that has a plan which seeks to participate in the growth of private companies through long-term investments in private securities internationally.

The best type of private equity is leveraged buyout funds which actually acquire control of stakes. An investor should be able to control the stakes and this will be to his advantage of him since he will be able to diversify his portfolio and have a good risk-return trade-off.