Distinctions Between Alternative & Traditional Investments

One significant distinction between traditional investments and their alternative counterparts is the minimum investment requirement and the fee structure. Traditional investments, such as mutual funds, often require minimum investments of roughly $2,000, and exchange-traded funds typically will require less than this. Alternative investments such as hedge funds and managed funds however often require minimum investments between $500,000 and $1 million, plus management fees of 1 to 2 percent of the fund’s assets and performance fees of 20 percent of the fund’s profit.

Liquidity is another key distinction between traditional investments and alternative investments. Investors can easily redeem their assets from traditional investments such as mutual funds; however, in the case of alternative investments, many are illiquid investments. For example, the shares in a real estate investment trust do not trade on the market and will not be available if you need to liquidate an asset to raise some quick cash.

Alternative investments remain distinct from traditional investments in that they tend to deliver higher returns. In addition, alternative investments often demonstrate positive returns even during tough markets. According to Kate Stalter, a contributing editor of Forbes Investing, alternative investments such as managed futures and commodities delivered positive returns even during the bear market of 2008, whereas most traditional investments suffered.

Traditional investments also differ from alternative investments in their level of regulation. Public companies issuing stocks and other traditional forms of investments are registered with and carefully regulated by the Securities and Exchange Commission, and their financial statements are independently audited. Alternative investments such as hedge funds on the other hand have little regulatory oversight and investors in these types of funds can be more vulnerable to fraud.