Risk Management, Trading & Portfolio Strategies

The risk of exotic investment opportunities

Investing in alternative products can be a huge gamble.

Investing in alternative products can be a huge gamble.

Individual investors have a growing number of places where they can put their money besides the traditional stock, bond, currency and commodities markets. Private-equity mutual funds, startup businesses and even professional athletes are offering part of their enterprises to interested parties. Although they're growing in popularity, are these alternative investments safe?

Before going further, let's not forget that investing – whether in the stock market or some exotic fund – is risky. What tends to set alternative investments apart is the information that is available about them. There's not much that individual investors can do to research the product beforehand. They must simply rely on the materials provided by a fund manager or holding company. 

In the case of the aforementioned professional athlete, you may have heard about NFL star Arian Foster welcoming investors to buy shares in his future career earnings. The Houston Texans running back was injured before the IPO happened, but that may have been a good thing, at least for anyone interested in putting their money into an athlete's brand. According to Kiplinger's, Foster was backed by a brokerage firm called Fantex. The source reports that investors may not have been able to sell Foster's stock because their investment also gave them an interest in Fantex – which is currently bleeding money. 

In an interview with MarketWatch, Jeremy Radcliffe, president and chief operating officer of wealth-management firm Salient Partners, said that alternative products are a bad idea for individual investors because "they fail to achieve what we view as the most important objective for an alternative investment, which is to actually diversify the portfolio away from equity risk."

To actively manage your portfolio and reduce risk, consider using SmartStops' investment analysis software

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