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Exploring Unconventional Alternative Investments

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In our previous chapter, we saw various types of alternative investments and their landscape in India. In this chapter, let us explore a few more alternative investments, which can be hidden gems for investors. 

Asset Leasing

Leasing is a contract under which the owner of an asset (lessor) enables a second party (lessee) to use that asset in exchange for monthly rental payments. The lessee gets to use the asset, and the lessor still owns it.

Lease contracts are frequently applied for cars, assets, machinery, and land. Nevertheless, every asset can be a lease candidate, making leasing an unusual investment.

Investors can buy assets such as furniture, electronics, machinery, or vehicles and then lease them to businesses for a fixed monthly fee. This gives an investor a constant flow of income. At the same time, businesses can consume what they need without sizable initial capital investments.

Compared to traditional investments, leasing can offer investors some key benefits:

  1. Diversification: Leased investment systems do not move according to the stock market's direction, so they are appropriate for the diversification of the portfolio.
  2. Passive income: Leasing investments are cash flow generators that give investors steady monthly passive income.
  3. Inflation hedge: Inflation escalators are typically included in payment leases, hence the maintenance of the whole purchasing power across time.
  4. Low volatility: Leasing returns are obligations stipulated in a contract and are independent of price fluctuating vectors like stocks and bonds.
  5. Collateralisation: The asset being leased becomes security, lowering credit risk.

Although leasing investments do have risks like tenant defaults, they have historically provided stable returns. Leasing is an attractive investment vehicle for accredited investors seeking to diversify their portfolio with 10-15% potential returns and low minimums starting at about $20,000.

Paintings (Fine Art)  

Fine art includes paintings, sculptures, and other works produced mostly for aesthetic considerations instead of utility. As demand rises and supply diminishes, many investors have made handsome returns by buying and selling fine art over time.

Paintings are likely the most common fine art investment. Some painters and pieces, in particular, have sold for exorbitant prices at biddings. Just for instance, Salvator Mundi, which is a painting attributed to the hand of Leonardo da Vinci, was sold in 2017 for an astronomical price of $450 million.

While not every painting will sell for nearly half a billion dollars, some attractive characteristics make fine art potentially rewarding for investors: 

  1. Scarcity: Most of the works of the most famous artists are unique or limited in number.
  2. Rising wealth: High amounts of high-net-worth individuals are being created globally, leading to demand for rare collectables.
  3. Portability: Paintings are portable assets that can be traded easily anywhere in the world.
  4. Passion asset: Art creates an emotional response in consumers, who generally strongly like particular items.
  5. Store of value: Artwork has been an asset that has been preserved in value over centuries. Indeed, it has retained value despite inflation and economic crises.

That said, fine art investing also comes with substantial risks:

  1. High costs: Large amounts of front-end capital are necessary to participate in the blue-chip art market, with prices often reaching into the millions.
  2. Long holding periods: It may take decades to realise large gains from artworks.
  3. Subjective valuations: Art prices are unpredictable and depend on arbitrary tastes that may change in time.
  4. Lack of cash flow: Paintings do not carry any dividends or interest while they are held.
  5. Low liquidity: The art market is illiquid; therefore, selling at intended prices can be difficult.
  6. Counterfeits: Fake artworks are rampant and can ruin value for innocent buyers.

Messier contends in her essay that, while fine art does not exhibit a high average return of 1% per year, it remains an attractive and interesting financial asset class for investors willing to take on considerable risks and with a strong ability to form expert evaluations. However, proper due diligence is necessary when entering this sophisticated market.

Sneakers

Sneaker collecting is now a trendy hobby, and non-standard and limited-edition sneakers are often sold for sky-high prices. Savvy investors are observed as an alternative asset class collectable sneakers.

Some of the ways sneakers can appreciate in value over time include:

  1. Limited supply: Collab drops, meaning shoes manufactured by partnering with pop culture icons or limited sneaker runs, are, in most cases, highly produced in quantity and generate buzz.
  2. Increasing rarity: Sneakers are generally worn and therefore, it gets difficult to find pairs in mint condition that retain the highest resale value. This makes the well-preserved pairs more valuable when resold.
  3. Iconic status: Models linked with stars, famous athletes, or historical events acquire an iconoclast cultural value.
  4. Retro appeal: The demand for certain designs returns as nostalgia comes into play, raising prices for original releases.

For instance, the resale price of Nike’s Air Jordan sneakers has multiplied many times since its release. The original price for an Air Jordan 1 High Chicago was $65 back in 1985, but recent sales of deadstock pairs have reached over $6,50,000.

While no other sneaker investment has seen gains akin to the rarest Air Jordans, projected future returns for collectable sneakers are still attractive:

  1. Diversification: Sneaker investing offers non-correlated traditional asset market exposure.
  2. Passion asset: Sneakerheads usually have personal attachments to favourite models, in turn, making price premiums.
  3. Inflation hedge: Rarity tangibility commodities such as collectable sneakers are an effective hedge against inflation.
  4. Low barriers: Compared to many other options, sneaker investment has low entry barriers, with models retailing under $200.

However, there are also significant risks:

  1. High fees: Platform costs, storage expenses, insurance, and freight accumulate with time.
  2. Low liquidity: A market for any given model may instantly close and make exits challenging.
  3. Unpredictable demand: Sneaker trends change, so it is hard to predict future appreciation.
  4. Storage risks: Wrong storage results in damage and value deterioration.
  5. Counterfeits: There are many counterfeit sneakers; therefore, authentication is crucial when purchasing and selling.

However, vintage sneakers are an alternative investment, with returns estimated to be in the range of 10-15%. However, appropriate research and diligence are mandatory.

Other Alternative Investment Types

In addition to the major alternative asset classes discussed, there are several other niche investment types investors can consider:

Watches

Collectable luxury watches like Rolex, Patek Philippe, and Audemars Piguet models can be appreciated substantially based on scarcity and demand from watch enthusiasts. Iconic sports watches have gained investor interest.

Whiskey

Rare whiskies and bourbons have attracted investor attention based on rising global demand and limited supply of certain aged bottles. Famously old single malt Scotches and cult American whiskeys have seen large price gains at auction. For example - A bottle of Macallan Adami 1926 whiskey sold for a record-breaking £2.2 million ($2.7 million) at a recent Sotheby's auction in London.  

Classic cars
Vintage models like 1960s Ferraris, Mercedes, and Porsches have a certain demand Auto enthusiasts and nostalgic baby boomers can help in fueling the market for landmark classic cars.

Rare coins

Scarce coins like the 1933 Double Eagle $20 gold piece have sold for millions among collectors. Coins with low mintages, unusual errors, or important connections tend to appreciate most over time.

Musical instruments
Iconic instruments like guitars owned by famous musicians are highly sought after. Stradivarius string instruments, Paul Reed Smith and Gibson guitars, vintage Fender Stratocasters, and other elite instruments can gain tremendous value.

Comics

Rare vintage comic books like Action Comics #1, Detective Comics #27, and Amazing Fantasy #15 have sold for millions of dollars at auction. Comics in pristine condition from iconic superhero series or key storylines appreciate substantially.

Vintage video games

Retro video games and sealed copies from the 8-bit and 16-bit eras of the 1980s and 90s have soared in value as nostalgic collectors revisit their youth. Mario, Zelda, Mega Man, and Sonic releases for NES, SNES, Genesis and other vintage systems drive prices.

Wine

Fine wines from prestigious French regions like Bordeaux and Burgundy have long attracted investors' attention. Wines rated perfect 100-point scores by critics or connected to historic domains can gain value over decades.

Meteorites

Extraterrestrial rocks that have fallen to earth, such as meteorites and lunar samples, have high values among collectors. Rarity, size, classification, and origin influence values.

While less tested than traditional alternatives, these niche assets have gained investor interest for their scarcity, passionate collector markets, and asset tangibility. As with any investment, careful due diligence is required to assess risks and potential. However, adding exposure to eclectic alternative assets allows further portfolio diversification.

Conclusion

Alternative investments encompass a diverse range of non-traditional asset types ranging from fine art and collectables to real assets like real estate. Gaining exposure to alternatives can provide portfolio diversification, inflation hedging, high returns, and other benefits.

While alternatives come with unique risks like lower liquidity and higher complexity, the ability to invest in assets uncorrelated with traditional securities can improve portfolio resilience during periods of stock and bond market volatility.

For suitable investors willing to undertake rigorous due diligence, niche alternative investments can be a prudent addition for improving overall portfolio performance and risk-adjusted returns.

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