What Are Alternative Investments? A Practical Guide for Individuals Who Want to Start
What are alternative investments? In plain terms, they are investments outside the traditional mix of publicly traded stocks, bonds, and cash. Private equity, private credit, real estate funds, hedge fund strategies, venture capital, and certain commodity or infrastructure investments are common examples. For qualified investors, alternatives may add sources of return or income that behave differently from public markets, but they also come with higher minimums, less liquidity, more complex fees, and tax reporting that can surprise people.
Many investors reach the same point: "I want to invest in alternatives. Where do I start?" The honest answer is that you start with your plan, not with a product. This guide explains the main categories, the questions worth asking, and how alternatives connect to both your portfolio and your tax picture.
Start Here: A Complimentary Wealth and Tax Review
Before adding any private investment, it helps to know how your current portfolio, cash needs, and tax situation fit together. Compound offers a complimentary, no-obligation wealth and tax review that may include:
Your current allocation: how much is in public stocks, bonds, cash, real estate, and any existing private holdings
Liquidity needs: what you may need to access over the next several years
Investor eligibility: whether you may meet the standards required for certain private offerings
Tax considerations: how K-1 reporting, ordinary income, and capital gains from alternatives may affect your returns
Goals and timeline: whether long lockup periods fit your plans
Request your wealth and tax review.
What Are Alternative Investments, by Category?
Alternatives are a broad label. These are the categories individuals most often ask about:
Private equity. Ownership stakes in private companies, usually through a fund that buys, improves, and later sells businesses. Holding periods are often long, and capital is typically called over several years.
Private credit. Loans made directly to companies outside the public bond market. Income can be attractive, but credit risk and limited liquidity deserve close review.
Real estate funds. Pooled investments in properties or real estate debt, managed by a sponsor. These differ from owning a rental property yourself.
Hedge fund strategies. Funds that may use leverage, short selling, or derivatives in pursuit of returns that are less tied to the overall market.
Venture capital. Early-stage company investments with a wide range of possible outcomes, including the loss of the entire investment.
Real assets and other strategies. Infrastructure, natural resources, and other specialized areas.
For a deeper look at how private holdings behave, see our guide to private market investments.
Who Can Invest in Alternatives?
Many private offerings are limited to investors who meet federal standards based on income, net worth, or professional credentials, often called accredited investors or qualified purchasers. Some newer registered funds and interval funds have lower minimums, though they usually still limit how often you can redeem. Eligibility rules are set by regulators and can change, so confirming your status with your advisor is a sensible first step.
Where Do I Start? Five Steps for Alternative Investment Planning for Individuals
Alternative investment planning for individuals works best as part of a broader strategy. A practical sequence often looks like this:
Confirm your foundation. Emergency reserves, appropriate insurance coverage, and retirement contributions usually come before illiquid investments.
Decide on a role. Ask what you want the investment to do: generate income, diversify equity risk, or pursue long-term growth. The answer points to different categories.
Set a sizing guideline. Decide in advance what share of your portfolio could reasonably be tied up for many years without affecting your plans.
Understand the tax profile. Some alternatives produce ordinary income, some produce long-term gains, and many issue K-1s that can arrive late and require extended tax returns. State filing obligations may also apply.
Diligence the manager. Review track record methodology, fees, carried interest, conflicts of interest, valuation practices, and how and when you can exit.
Our guide on what to consider when evaluating alternative investments covers these questions in more detail, and our article on alternative investment education explains common terms you will see in offering documents.
Why Taxes Matter With Alternatives
Alternative investment management is not only about selecting funds. A private credit fund that pays interest may be taxed at ordinary income rates, which can make an account location decision (taxable account versus IRA) important. Private equity and real estate funds may pass through depreciation, capital gains, and losses in ways that interact with the rest of your return. Some investments can create unrelated business taxable income inside a retirement account.
When your tax planning and preparation team can see the same holdings as your investment advisor, these issues can be considered before you commit capital rather than after the K-1 arrives. To see how differences in after-tax returns may add up over time, try the Compound calculator. Results are hypothetical and for illustration only.
How to Evaluate Financial Advisors Offering Alternative Investments
Not all financial advisors offering alternative investments approach them the same way. Questions worth asking include:
Do you act as a fiduciary when recommending private investments?
How do you diligence managers, and who performs that work?
What additional fees apply on top of the fund's own fees?
How do alternatives fit into my overall allocation and liquidity plan?
Will my tax professional be involved before I invest?
For more, read what to consider when choosing an alternative investment advisor and how alternative investment wealth management integrates private assets into a broader plan.
How Compound Approaches Alternatives
Compound provides wealth management, investment management, and tax planning together, with access to alternative investment opportunities for qualified investors where they fit a client's plan. We work with individuals, families, business owners, and executives throughout Wisconsin, including Milwaukee, Madison, Green Bay, Appleton, Brookfield, and Eau Claire, as well as surrounding areas.
Curious whether alternatives belong in your plan? Request a complimentary wealth and tax review and start with a clear view of where you stand.
Frequently Asked Questions
What are alternative investments?
Alternative investments are assets outside traditional public stocks, bonds, and cash, such as private equity, private credit, real estate funds, hedge fund strategies, and venture capital. They often have higher minimums, less liquidity, and more complex fees and tax reporting.
I want to invest in alternatives. Where do I start?
Start with your overall plan: confirm your cash reserves and liquidity needs, decide what role alternatives should play, set a sizing guideline, and review the tax profile and manager before investing.
Do I need to be an accredited investor?
Many private offerings require investors to meet federal eligibility standards. Some registered funds are available more broadly but may limit redemptions. Your advisor can help confirm which options may apply to you.
How are alternative investments taxed?
It depends on the investment. Income may be taxed as ordinary income or capital gains, and many funds issue K-1s that can arrive late in tax season. Coordinating with a tax professional before investing is worth discussing.
Are alternatives right for everyone?
No. Illiquidity, higher fees, and complexity mean alternatives may not be suitable for many investors. They are generally considered only after core financial needs are in place.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Alternative investments involve additional risks, including illiquidity, and are available only to qualified investors. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
As financial situations become more complex, many individuals seek planning that considers more than one aspect of their financial life. Compound Wealth integrates tax planning, wealth management, accounting, and business transition services to help clients evaluate decisions within the context of their broader financial objectives.
