An alternative investment is anything that is not one of the three traditional asset types: stocks, bonds and cash.
That means there is a wide range of investments that fall under the alternative investments umbrella, including hedge funds, managed futures, real estate, commodities and derivatives contracts, explains Richard Coppa, certified financial planner and managing director of Wealth Health.
Alternative investments, which were aimed only at the super wealthy, can now bring significant benefits to any investor's portfolio by diversifying risk exposure away from traditional fixed-income and equity assets, according to Coppa.
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However, Coppa suggests that before using alternative investments as part of a portfolio, investors need to do their homework and check on the costs and fees associated with these investments.
Coppa also says it's important to ask these questions: Are you investing for a long time horizon? Does your portfolio need additional diversification beyond typical stock and bond asset classes? Is your risk tolerance sufficient for these lightly regulated investments? Do you have a trusted financial professional helping you find the right investment options?
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The fact remains that alternative investments are no longer just for wealthy investors. However, just because less-affluent individuals can now invest in alternatives doesn't mean they should. It has to be the right investment strategy for that investor, Coppa warns.
Many of these products do come with high fees and too much risk, so it's key to do your research before investing in "alts."
