The early history of alternative investments can be traced all the way back to the frenzied trading of tulip bulbs in the 1600s. In years past, the idea of alternative investments included much more than the industry standards of today. To the untrained eye, simply a fad could be and has been considered an “alternative”. It has come a long way since then, and has developed into a much more sophisticated system. Purchasing and selling property – such as gold, coal mines and real estate – and buying and selling loans and futures are all popular forms in alternative investing.
How Dutch Fortunes Were Built
In the 1600s, the advent of the Dutch tulip bulb swept across Holland in a blaze of popularity. The bulbs were highly sought after because they appeared in a popular Swedish painting, and the transportable nature of the plant only boosted its value as it was easy to move and store. During these times, people were trading homes and property for bulbs, and once they discovered they could breed the bulbs as hybrids, the demand skyrocketed. However, the hybrid bulbs were more fragile, which caused the value to decline and investors to lose their fortunes.
The Advantage of Alternative Investments
The Dust Bowl, a precursor to The Great Depression, began with droughts that killed off the wheat industry, a staple commodity in American markets. The coming of the Depression further pushed commodities markets into the same dark days as the rest of the country. The drop in prices was seen from 1929-1932, especially in the agricultural sectors as consumers didn’t have the money to buy food. However, commodities rebounded significantly after 1933, and currently, have an all-time higher average.
Regulating the Previously Unregulated
The nature of alternative investments allows a skilled investor to be able to make money even when the market declines, such as it did in 2008 and 2009. Today, commodities are more heavily regulated, extending protection to investors who practice beyond stocks. In the past, commodities had a stereotype of being a highly volatile investment. Now, alternative investments have become a more common option for portfolio diversification. The maturing of the futures industry has given the world a new legitimate option for an alternative investment, and after recent cycles of volatility, most portfolio managers suggest that they should be an essential part of any large portfolio.
By definition, alternative investments are riskier than traditional ones, but they can also be more lucrative. However, there is a big difference between risky and crazy. Because of their complex nature, they should be understood before participating. Jumping into the alternative markets can reduce the drawdown of a portfolio if done properly. Working with a professionally certified broker can reduce some of the risk of investing in alternative markets.