What Are Alternative Investments? Types, Benefits, & Risks
Alternative investments explained: Types, benefits, and risks
Author: The Carta Team
Read time: 10 minutes
Published date: April 1, 2026
Learn the fundamentals of alternative investments, including the primary asset classes, their unique risk and return profiles, and the operational framework for managing a private fund.
Contents
- What are alternative investments?
- How alternatives differ from traditional investments
- Types of alternative investments
- Benefits and risks of alternative investing
- How to invest in alternative assets
- The operational engine of alternative funds
- Frequently asked questions about alternative investments
What are alternative investments?
An alternative investment is a financial asset that does not fall into one of the conventional investment categories like public stocks, bonds, or cash. These investments exist outside of the public markets and form the foundation of private markets, where new companies are built and value is created away from the daily fluctuations of the stock exchange.
These assets are "alternative" because they offer a different approach to investing, often with different goals, timelines, and risk profiles compared to what you might find on a public stock exchange. They represent a world of investment opportunities that operate on its own terms, powering innovation and growth in ways that traditional assets typically do not.
Understanding these alternative asset classes is key to understanding how a significant portion of the modern economy is funded and grown. The scale of this ecosystem is immense: Private investment funds are the backbone of the private markets.
How alternatives differ from traditional investments
To understand alternative investing, it’s helpful to see how it contrasts with the traditional investment products most people are familiar with. The core distinctions often revolve around liquidity, regulation, access, and correlation to broader market trends.
| Characteristic | Traditional investments | Alternative investments |
| Liquidity | High: Can be bought and sold easily on public exchanges. | Low: Capital is often "locked up" for many years; cannot be sold quickly. |
| Regulation | Highly regulated: Subject to extensive oversight by bodies like the SEC and FINRA. | Less regulated: Fewer public disclosure requirements. |
| Access | Public: Open to nearly all investors. | Private: Often restricted to accredited investors and institutions. |
| Correlation | High: Tend to move in relation to broader economic trends. | Low: Performance is often independent of public market fluctuations. |
Types of alternative investments
The world of alternative investments is vast, but a few key types form the core of the professional investment landscape.
Private equity and venture capital
Private equity (PE) is the practice of taking an ownership stake in a company that is not publicly listed on a stock exchange. This can involve buyouts of a mature business to improve its operations or providing growth equity to help a growing company expand.
Venture capital (VC) is a specific type of PE that focuses on providing capital to startups and early-stage companies with high growth potential.
Private credit
Private credit involves providing privately negotiated loans to companies, serving as an alternative to traditional bank financing or public debt markets.
Real assets
Real assets are investments in physical assets that have intrinsic value. These include:
- Real estate: Commercial properties like office buildings, industrial warehouses, and large-scale residential apartment complexes.
- Infrastructure: Long-term projects essential to a society's function, such as toll roads and airports.
- Commodities: Raw materials or agricultural products, such as crude oil, precious metals like gold, or agricultural goods like grain.
Hedge funds
Hedge funds are alternative funds that use complex investment strategies to generate returns for their investors.
Other alternative assets
This includes collectibles like fine art, rare wine, and classic cars, as well as intellectual property such as film rights, music royalties, and patents.
Benefits and risks of alternative investing
Benefits: Portfolio diversification and return potential
Investors are drawn to alternatives for several key reasons:
- Portfolio diversification: Alternative assets often have a low correlation with public stock and bond markets.
- Return potential: Investing in private companies provides access to businesses in their early and high-growth phases.
Risks: Illiquidity, complexity, and fees
The potential for higher returns comes with unique risks:
- Illiquidity: An investor's capital is typically committed for many years.
- Complexity and transparency: Valuing a private alternative asset is more complex than checking a public stock price.
- Fees: Alternative investment funds often have a different fee structure than mutual funds.
How to invest in alternative assets
Participation in this market looks different depending on whether you are an investor providing capital or a manager deploying it.
Accessing alternatives as an LP
Most investors participate by becoming an LP in a private investment fund.
Creating investment vehicles as a GP
Aspiring fund managers create alternative investment vehicles to pool capital from LPs.
The operational engine of alternative funds
Running an alternative investment fund requires managing the fund, its investors, and its assets.
Fund formation and investor onboarding
Critical back-office work is needed for fund formation and compliance checks.
Capital calls and distributions
A capital call is the process a GP uses to collect committed capital from LPs.
Portfolio valuation and audit readiness
Private company investments must be assessed via portfolio valuation on a recurring basis.
LP reporting and communications
Keeping LPs informed with timely and accurate reports on fund performance is crucial.
Why a modern technology stack is essential for fund management
The growing complexity of the alternative investment industry has outgrown outdated tools. A modern, integrated alternative investment platform centralizes all fund activity and data.
Frequently asked questions about alternative investments
What is an alternative investment vehicle?
An alternative investment vehicle is the legal structure that pools capital from investors to make investments in assets like private companies.
Are alternative investments only for accredited investors?
While direct investment in private alternative funds like PE and VC is generally limited to accredited investors, some types of alternative assets can be accessed by retail investors through publicly traded vehicles like Real Estate Investment Trusts (REITs).
What is the difference between private equity and venture capital?
VC is a type of PE that focuses specifically on funding high-growth, early-stage startups.