What Are Alternative Investments? Types, Benefits, & Risks
Alternative investments explained: Types, benefits, and risks
Author: The Carta Team
Read time: 10 minutes
Published date: 1 April 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.
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 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. In both PE and VC, the key participants are general partners (GP), who manage the fund, and limited partners (LP), who provide the capital for the fund to invest.
Private credit
Private credit involves providing privately negotiated loans to companies, serving as an alternative to traditional bank financing or public debt markets. The goal for the investor is to earn returns from contractually agreed-upon payments rather than gaining ownership of the company.
Real assets
Real assets are investments in physical assets that have intrinsic value. These are tangible assets that play a critical role in the economy by providing essential services and resources.
- Real estate: Includes commercial properties and large-scale residential complexes.
- Infrastructure: Investments in long-term projects like toll roads and airports.
- Commodities: Covers raw materials or agricultural products like crude oil and precious metals.
Hedge funds
Hedge funds use a wide variety of complex investment strategies to generate returns for their investors, taking long and short positions in stocks, trading derivatives, and investing across different asset classes.
Other alternative assets
This includes niche investments like collectibles, intellectual property, and more specialized assets often requiring specialized knowledge to manage.
Benefits and risks of alternative investing
Benefits: Portfolio diversification and return potential
- Portfolio diversification: Can help cushion a portfolio during periods of market volatility.
- Return potential: Investing in private companies can provide access to significant capital appreciation before a company becomes publicly known.
Risks: Illiquidity, complexity, and fees
- Illiquidity: Capital is often committed for a long period, making it hard to convert back into cash quickly.
- Complexity and transparency: Valuing private alternative assets is more complex than public stock prices.
- Fees: Alternative investment funds typically have a different fee structure than mutual funds, requiring LPs to ensure accuracy in fees.
How to invest in alternative assets
Accessing alternatives as an LP
For most investors, participating involves becoming an LP in a private investment fund. This role often requires accreditation due to associated risks.
Creating investment vehicles as a GP
Aspiring fund managers typically create an alternative investment vehicle to pool capital from LPs, often starting with lower capital requirements.
The operational engine of alternative funds
Beyond strategy, running an alternative investment fund requires a complex operational structure, including managing the fund, investors, and assets. Fund administration is essential for efficient operations and maintaining trust with stakeholders.
Fund formation and investor onboarding
Essential administrative tasks include drafting legal documents and performing compliance checks on incoming LPs.
Capital calls and distributions
A capital call is the process a GP uses to collect committed capital from LPs when it's time to make an investment.
Portfolio valuation and audit readiness
Private investments must be assessed through recurring portfolio valuations governed by accounting standards.
LP reporting and communications
Keeping LPs informed with timely reports on fund performance is crucial. A modern solution allows for better communications and insights.
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 is generally limited to accredited investors, some types of alternative assets can be accessed by retail investors through publicly traded vehicles like 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.