As investors seek to diversify their portfolios beyond traditional stocks and bonds, alternative investments have gained increasing attention.
In Canada, there are a variety of alternative investments available to investors, ranging from private equity to real estate.
These investments can offer potential benefits such as higher returns, lower correlation to traditional investments, and exposure to unique market opportunities.
In this article, we will explore some of the best alternative investments available to investors in Canada, providing an overview of the potential benefits and risks of each investment type.
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What are Alternative Investments?
Alternative investments are investment vehicles that fall outside of traditional asset classes such as stocks, bonds, and cash.
These types of investments typically include assets that are not publicly traded, such as private equity, hedge funds, real estate, commodities, and infrastructure.
They are often considered to be more complex and less liquid than traditional investments but can offer potential benefits such as higher returns and diversification.
Alternative investments are generally considered suitable for sophisticated investors who have a high tolerance for risk and can afford to tie up their capital for extended periods.
Due to their complexity, high fees, and lack of transparency, they are typically only available to accredited investors, institutional investors, or high-net-worth individuals.
Pros and Cons Of Alternative Investments
The following are the top pros and cons of alternative investments you need to know before venturing.
- Diversification: Alternative investments offer an opportunity to diversify a portfolio beyond traditional asset classes such as stocks and bonds. This can help reduce risk by spreading investments across different sectors and markets.
- Potentially higher returns: Alternative investments can offer higher returns than traditional investments due to their higher risk and potential for greater reward.
- Non-traditional assets: Alternative investments provide access to assets that are not available through traditional investments, such as private equity, real estate, and commodities.
- Low correlation to traditional investments: Alternative investments may be less correlated with traditional investments, meaning that they can offer a way to protect a portfolio from market downturns.
- Higher minimum investment: Most alternative investments require higher capital than traditional investments.
- Higher fees: Alternative investments typically have higher fees than traditional investments. This is because they often require specialized knowledge and expertise to manage, and may involve complex legal and regulatory requirements.
- Greater complexity: Alternative investments can be more complex than traditional investments, making them harder to understand and evaluate.
- Less liquidity: Alternative investments are often less liquid than traditional investments, meaning that they cannot be easily sold or traded. This can make it difficult to access funds when they are needed.
- Greater risk: Alternative investments are generally riskier than traditional investments due to their lack of regulation, less transparent markets, and potential for greater volatility.
7 Best Alternative Investments in Canada
Having understood what alternative investments entail, let’s now explore some of the best options in Canada.
1. Private Equity
Private equity involves investing in companies that are not publicly traded, typically with the aim of taking them private, restructuring them, and eventually selling them for a profit
In Canada, private equity has become one of the best alternative investments for sophisticated investors seeking higher returns and diversification beyond traditional asset classes like stocks and bonds.
Private equity firms in Canada invest in a wide range of industries, including technology, healthcare, real estate, and energy.
They typically look for companies with strong growth potential, a proven track record, and a competitive advantage in their respective markets.
They may also take an active role in the management of these companies, providing guidance and strategic direction to help them grow and increase profitability.
One of the benefits of private equity investments is the potential for higher returns. However, private equity investments also come with risks.
They are illiquid, meaning that investors may not be able to sell their shares for several years. Also, they require a high level of due diligence to ensure that the company is a good investment.
Commodities are often considered one of the best alternative investments in Canada due to their potential for diversification and inflation hedging.
In Canada, investors can gain exposure to commodities such as gold, oil, and natural gas through futures contracts, options, and exchange-traded funds (ETFs).
These investments can provide a hedge against inflation since commodity prices often rise during periods of inflation.
Furthermore, commodities can provide diversification benefits to a portfolio since they tend to have a low correlation with traditional asset classes such as stocks and bonds.
This means that when traditional investments are underperforming, commodities may provide a source of returns that can help offset losses.
However, it’s important to note that commodity investments can be volatile and are not suitable for all investors. Investors should carefully consider their risk tolerance and investment goals before investing in commodities.
3. Real Estate
Real estate is considered one of the best alternative investments in Canada due to its potential for generating stable income streams and capital appreciation.
You can invest in real estate directly or indirectly. In other words, real estate investments can involve direct ownership of properties, or investing in real estate investment trusts (REITs) or real estate crowdfunding.
REITs allow investors to own a share of a portfolio of income-generating properties. This provides an easy way to invest in real estate without the hassle of managing properties directly, and they offer regular dividends to investors. Below are some of the leading REITS in Canada:
You can also invest in REIT ETFs such as:
- BMO Equal Weight REITs Index ETF (ZRE)
- Vanguard FTSE Canadian Capped REIT Index ETF (VRE)
- iShares S&P/TSX Capped REIT Index Fund (XRE)
You can invest in any of these ETFs using an online discount brokerage like Qtrade.
Real estate crowdfunding is another way to invest in real estate in Canada. This involves pooling funds with other investors to invest in real estate projects.
Crowdfunding platforms allow investors to browse and select investment opportunities, which can range from residential to commercial properties.
This type of investment provides investors with the opportunity to invest in real estate with a lower minimum investment amount and without the need for significant upfront capital.
The following are some of the real estate crowdfunding sites in Canada;
4. Hedge Funds
Hedge funds are investment funds that use complex strategies to generate returns, often using leverage and derivatives
These funds can potentially provide higher returns than traditional investments due to their potential for diversification and the expertise of their managers.
Hedge funds in Canada are regulated by the Canadian Securities Administrators (CSA) and are only available to accredited investors who meet certain income and net worth requirements.
While they can be expensive and have high fees, they may offer attractive risk-adjusted returns and can be a valuable addition to a diversified investment portfolio.
5. Peer-to-Peer Lending
Peer-to-Peer (P2P) lending is an alternative investment in Canada that involves lending money to individuals or small businesses through online platforms, bypassing traditional banks.
You can choose which loans you want to invest in and earn returns in the form of interest payments. The interest rates on P2P loans can be higher than those offered by traditional banks, providing you with an opportunity for higher returns.
Some of the top P2P lending platforms in Canada include:
- Lending Loop
P2P lending platforms typically use credit scoring algorithms to assess borrowers’ creditworthiness and assign them a risk rating.
However, it’s important to note that P2P lending carries risks, such as default rates, and is not covered by the Canada Deposit Insurance Corporation (CDIC) or any other government insurance program.
As such, you need to carefully assess the risks and rewards before investing in P2P lending.
6. Art and Collectibles
Art and collectibles have emerged as one of the best alternative investments in Canada.
This asset class can include a wide range of items such as fine art, antique furniture, rare books, and vintage wines. The value of art and collectibles is often determined by their rarity, historical significance, and condition.
One of the main advantages of investing in art and collectibles is that they have historically provided strong returns that are not correlated with traditional financial markets. They can also serve as a hedge against inflation and currency fluctuations.
However, investing in art and collectibles requires specialized knowledge and expertise. Investors need to be able to identify undervalued assets and navigate the complex market of dealers, auction houses, and appraisers. Storage, insurance, and transportation costs can also be significant.
Agriculture provides several benefits, including the potential for steady income from crop and livestock production, as well as a long-term appreciation of land values.
Investing in agriculture can take many forms, such as purchasing farmland, investing in agriculture operations, investing in agriculture-related companies, or investing in agriculture funds.
As the global population continues to grow, the demand for food is expected to rise, making agriculture an attractive investment opportunity for those looking to diversify their portfolio and capitalize on this trend.
However, investing in agriculture also comes with risks, such as weather and crop failures, commodity price volatility, and regulatory changes. So you need to do proper research and seek professional insight where necessary before venturing into agriculture investing.