Kevin Neal: Differences Between Traditional and Alternative Asset Classes

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In investment, diversification is the key to minimizing risk. In terms of asset location and diversification, for those seeking to create a lucrative portfolio it helps to know what asset options are available. It is also vital to identify which type best suits the investor’s financial situation. This article looks at both traditional and alternative asset classes, and the key differences between them.

What Are Traditional Asset Classes?

Traditional asset classes are those typically associated with the word ‘investment’, for example basic categories of cash, bonds and stocks.

Stocks are securities that represent a share of ownership in a company. There are two main types of stock: common and preferred.

Common stock owners usually receive dividends and vote at shareholder meetings. Preferred stock owners usually cannot vote but have a higher claim on earnings and assets than common stockholders.

Stock types include:

  • Dividend
  • Value
  • Foreign and Domestic
  • Small-Cap, Mid-Cap and Large-Cap
  • Growth
  • Emerging

Bonds are a form of debt investment. The investor loans the borrower money which the borrower repays at a fixed interest rate. Borrowers tend to be government entities or corporations.

There are several different types of bonds, including:

  • Short, Intermediate, and Long-Term
  • Emerging
  • Corporate
  • Government
  • Junk
  • Domestic and Foreign
  • Investment-Grade

The most liquid of assets are cash and cash equivalents. This includes actual cash and all equivalents readily capable of being converted into cash, such as Treasury bills and money markets.

What Are Alternative Asset Classes?

Alternative asset classes comprise less traditional forms of investment featuring unexpected investment options. Examples of alternative asset classes include real estate, private equity, commodities, foreign currency, derivatives, distressed securities, collectibles, insurance products, and venture capital.

Conclusion

Asset classes are essentially groupings of investments that share similar characteristics and are subject to the same regulations and legislation. Stocks, bonds, real estate and commodities are all different classes of asset.

Asset classes fall into two separate groups: traditional and alternative.

Alternative asset classes are types of investments that do not fall into traditional asset classes. Due to the unconventional nature of alternative asset classes, valuing the investor’s holdings can be challenging, since liquidity of some alternative assets – such as antiques, pieces of art, and other collectibles – can be questionable.

Whether the investor chooses to invest in traditional or alternative assets, diversification is key. By understanding the differences between asset classes, investors are better equipped to choose the right investment to suit their individual needs.

As Distribution Director for Bluefin Capital (Luxembourg), Kevin Neal is responsible for overseeing global distribution of property and alternative asset classes worth in excess of 500 million. With more than 20 years of investment industry experience, Kevin Neal is uniquely placed to lead the company’s global distributions, managing wealth and distributing family funds.

Claire James
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