What Is Illiquid Alternative Investment & Why Is It Important?

An illiquid alternative investment is an alternative investment like fine art or real estate that cannot be bought and sold frequently. 

But, illiquid alternative assets offer relatively higher returns than traditional assets.

Discover all about illiquid alternative investments - why you should invest in illiquid alternatives, three different types of illiquid alternatives, and a few things to consider before investing in them.

Also, explore how fine wine (although considered illiquid) is actually liquid and can be quite rewarding for your portfolio.

Why Invest In Illiquid Alternative Investments?

Here are a few reasons why you should invest in illiquid alternative investments.

• An illiquid alternative investment usually has a low correlation with a traditional investment like a mutual fund or stocks, which helps stabilize the portfolio during turbulent times.
• Illiquid alternative assets offer higher returns than traditional investments.
• These alternative investments also offer a great opportunity for portfolio diversification, minimizing the overall investment risk.
• The illiquidity of alternative investment assets protects the investor from panic selling. 
• Illiquid alternative investments are less volatile, acting as a natural hedge toward daily swings of the public market.
• Illiquid asset classes have longer hold periods, helping investors find the best-selling opportunities and maximize returns.
• In the US, alternative asset classes are monitored by the SEC. The FCA (Financial Conduct Authority) has also defined a few regulations for alternative investment companies in the UK.

But, what are the different types of illiquid alternative investments? And, which illiquid investment should you go for?

Types Of Illiquid Alternative Investments

Illiquid alternative investment asset classes can be broadly classified into three categories:

• Real Assets
• Private Equity
• Alternative Credit

1. Real Assets

This alternative asset class includes tangible assets that involve direct ownership of nonfinancial asset classes like fine wine, real estate, and fine art.

These asset classes tend to increase in value over time due to different factors. 

For example, real estate is an illiquid asset that showcases excellent price appreciation. Real estate price usually increases due to infrastructure developments and rising inflation.

A fine wine shows excellent price appreciation over the years because it develops subtle tastes and complexity. Also, with time, the availability of fine wine reduces due to consumption. The scarcity paired with high demand increases its value.

Now, even if fine wine is considered an illiquid asset, modern wine investing platforms like Vinovest make wine investing almost liquid. Through these platforms, you can buy and sell wines easily at any time. 

You can even have it delivered to your home to uncork it for a celebration!

But, keep in mind that it’s when the wines get close to their peak maturity that you’ll see the most liquidity, price appreciation and demand. 

You could buy wine and sell it tomorrow. But it makes sense to have a longer-term outlook to wine investing.

2. Private Equity

Private equity investment involves taking ownership positions in a company not listed on a public stock exchange. 

In standard terms, a private equity fund is when you provide capital to a new business and get an equity ownership stake in the company. So, when the company grows, your profit also increases. 

The most common private equity investment is venture capital investment. Venture capital investments involve equity of leveraged buyout (LBO) of an existing business or offering distressed debts to a previously healthy firm.

3. Alternative Credit

These alternative investments include providing illiquid financing to borrowers who cannot access traditional credit institutions like banks.

The most common type of alternative credit is private credit (or private debt) which involves acquiring the debt of a private company. 

You can lend private credit or private debt to listed and non-listed companies and tangible assets like real estate and infrastructure.

How Do Illiquid Alternative Investments Differ From Liquid Assets?

Illiquid investments are less flexible and have longer lock-up periods than liquid investment assets like a mutual fund or hedge fund. 

However, liquid investment returns aren’t as rewarding as the returns from illiquid alternatives. Also, liquid alternatives like hedge funds are mainly accessible to wealthy and institutional investors.

A hedge fund usually operates in the public market, and this investment vehicle is frequently used to minimize inflation risk.

Now, we’ll give you good reasons to invest in a real asset like wine.

Why Should You Invest In Fine Wine?

Whether you’re an accredited investor, an individual investor, or a retail investor, fine wine can be a perfect investment. 

Here’s why fine wine needs to be a part of your investment strategy:

• Steady Yields: Fine wine has consistently outperformed the Global Equity Index for the past 15 years, even during downturns. In 2021, when the Global Equity Index grew by 196%, the fine wine market rose by 304%.
• Scarcity: Fine wine is often produced in limited quantities. Due to consumption, the quantity decreases with time, and the demand rises, resulting in price increases. That’s why these wines fetch astronomical prices in the secondary market.
• Aging: Fine wines improve with time, as long as they’re stored well. 
• Brand Equity: Wineries like Screaming Eagle and Domaine de la Romanee Conti are some of the most prestigious wineries in the world. Their bottles consistently sell for thousands of dollars on the secondary market.
• Inflation Proof Investment: The fine wine market has little correlation to inflation and continuously outperforms the Consumer Price Index. In 2021, when the annual inflation in the US was around 5%, the fine wine market saw a growth of 23%.
• Low Volatility: Unlike the stock market, the fine wine market is not volatile and provides stability to regular investors.

Most investment-grade wines need 10-15 years to mature - perfect for long-term investment.

Things To Consider Before Investing in Illiquid Alternatives

Here are a few factors to consider before adding an illiquid alternative asset to your portfolio.

• Since most illiquid alternatives aren’t publicly traded, gauging a fair price for these asset classes isn't easy.
• You will need proper storage conditions to store collectibles like fine art and fine wine.
• Typically, illiquid alternative investments have higher minimum investment requirements. However, wine investment platforms like Vinovest allow you to start your wine investment journey with as little as $1,000.
• Unlike hedge funds and other liquid alternatives, illiquid alternatives usually have longer lock-up periods, meaning these assets cannot be redeemed/sold daily.
• Because of their complex nature, illiquid alternative investment asset classes are mostly held by institutional investors or accredited investors.    

Now, all of these issues are solved if you invest in an asset like wine through an intelligent platform like Vinovest.

How To Invest In Wine Through Vinovest

You don’t have to be a private investor or an institutional investor to invest in this illiquid asset class. 

This world-class wine investment company can:

• Buy, store, and insure authentic investment-grade wines for you, with just a few clicks. 
• Store your wine in temperature-controlled bonded warehouses with optimal humidity, light, and vibrations.
• Find the perfect buyers from its extensive global network when you're ready to sell. 
• Track your wine investment portfolio to ensure you earn maximum returns.

Vinovest charges a minimal annual fee of 2.5% (1.9% for a portfolio of $50,000 and above.) This fee includes buying, selling, full-coverage insurance, storage, and portfolio management. 

To get started, just follow these steps:

• Sign up
• Fill up a short questionnaire to determine your investing style: balanced, conservative, or aggressive. 
• Fund your account with a minimum of $1,000.
• Go ahead and start adding investment-grade wines to your portfolio.

Vinovest charges a minimal 2.5% annual fee (1.9% for a portfolio of $50,000 and above.) This fee includes buying, selling, storage, portfolio management, insurance, and authentication.

Start Investing In Fine Wine Today!

Whether you’re investing in hedge funds or fine wine, it is essential to have a clear investment objective. Wealth management is vital when investing your fixed income. 

Asset managers will give you the required investment advice, help you determine the best investment strategy, and also avoid any investment risk.

Fine wine is a unique illiquid alternative asset that gives investors a great investment opportunity to diversify their portfolios and earn rewarding profits.

Sign up with Vinovest to start investing in fine, collectible bottles today!