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In part two of the alternative investment article series, we will go over the definitions of some popular alternative investment types.

Hedge Funds

Hedge funds are alternative financial investments pools that typically use risky investment strategies or asset types. They are actively managed, charge much higher fees than other investment funds, and usually require their investors to pay high deposits. Over the last five years, the number of hedge funds has been growing; this has been a resurgence, as hedge funds lost popularity after the financial crisis of 2008.

Fund of Funds

A fund of funds is a multi-manager investment pool that puts in money in other types of funds. To put it simply, an FoF’s portfolio is made up of the portfolios of additional funds. FoFs primarily invest in a hedge or other mutual funds and are separated into two categories: “fettered” or “unfettered.”  Fettered portfolios often come with lower prices but aren’t as diverse, and unfettered portfolios come with greater diversification in investment and management styles and strategies.

Private Placements 

A private placement refers to the sale of a stock or bond to an already specified group of investors or an institution rather than offering them on the open market. It provides an alternative to the typical IPO (initial public offering) for a business that wants to raise capital for itself.

Usually, people who participate in private placements are wealthy individuals, accredited investors, banks, and other big financial institutions. One of the most significant advantages of private placements is the fact that it’s subject to very few regulatory requirements.

Real Estate Investment Trust (REITs) 

A REIT is a company that operates, owns, or alternatively finances income-generating real estate. This alternative investment was modeled after mutual funds, and typically REITs collect capital from a large variety of investors. That way, individual investors can earn dividends from investing in real estate without really having to purchase, manage, or finance an entire property. 

Typically, REITs generate a good income stream for their investors but don’t offer a lot of capital appreciation. Most are publicly traded, very much like stocks and bonds, which means that they’re liquid. Good REITs invest money in different property types like cell towers, data centers, hotels, apartment buildings, medical facilities, office retail, and warehouses.

Opportunity Zone

Opportunity zones are a development tool that allows individuals to invest in underdeveloped areas in the United States. The whole idea behind them is to spur economic growth and advance those areas while providing their investors with three primary tax benefits: 

  • Temporary delay of taxes on previously earned capital gains: This allows investors to place already existing assets with their capital gains into an Opportunity Fund. That way, they won’t get taxed until the asset is disposed of. 
  • Basis step-up of previously earned capital invested: If capital gains are placed into an Opportunity Fund for five years, the investor gains a 10% increase based on the original investment. If they’re invested for at least seven years, they get a 15% increase.
  • Permanent exclusion of taxable income on new gains: For any investments that are held for ten or more years, investors don’t pay any taxes on any capital gains that have occurred thanks to their investment in an Opportunity Fund.

Physical Assets 

Physical assets might also be called “tangible assets.” They are items that have an economic, commercial, or exchange value and exist in the physical world. 

When it comes to investing, physical assets typically hold some sort of an established value. The entire idea behind investing in such financial assets is to buy them at one price today and then sell them for a higher one in the future. For businesses, tangible assets include things like inventory, office space, and equipment, while for individuals, they’re things like land, homes, and collectibles (wine, art, antiques).

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips,  but I promise I will get them for you.   Michael Torrence 

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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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