What Are Alternative Investments and How Does Agriculture Fit In?

It’s no secret that the stock market is the most common choice for most investors attempting to build their nest eggs. Millions of Americans regularly add stocks to their retirement accounts with the expectation that their hard-earned dollars are safe. Market cycles and inevitable corrections are a normal part of investing. However, some analysts are predicting that the next stock market crisis could eclipse that of 2007-2008. Cash, the traditional safe haven for investors, is not attractive due to persistent historically low interest rates, and large cash positions are continually eroded by inflation. This largely unprecedented environment has investors scrambling to protect their financial wealth and secure yield through alternative investments.

What Are Alternative Investments?

Simply put, alternatives are investments outside publically-traded equities, fixed-income markets, and cash. They include private equity, natural resources, and real estate, among others. Alternatives are typically preferred by institutional investors such as pension funds, hedge funds, university endowments, as well as high net worth individuals. Most alternatives are negatively correlated to the stock and bond markets, making them superb for hedging portfolios against market corrections. Moreover, alternatives are generally not as liquid as conventional investments. In times of market volatility, this illiquidity protects portfolios containing alternatives from massive swings in value. The stock market is very efficient due to its large number of participants, low transaction costs, and information that can be accessed (for the most part) equally by all of those participants. The efficient market hypothesis theory asserts that investors in private markets (where alternatives are generally accessed) have access to privileged information, higher barriers to entry, and less competition, and therefore can achieve higher returns than the stock market. Finally, because they are generally held for longer than 12 months, alternatives are subject to lower, long capital gains tax rates.

How Does Agriculture Fit In?

Agricultural may not be the first thing that comes to mind when thinking about alternative investment options. As one of the oldest trades (arguably the oldest) its products are in everything we own. From the wood in our houses, to the food we eat, to the fabrics in our clothes, agriculture is vital to our way of life.

Like other alternatives, agriculture investments offer superior returns, and provide a hedge against volatile equity markets. Farmland and timberland are illiquid and most suitable for investors who want to grow their wealth for the long term. Agriculture investments can safely offer both yields that beat cash positions, and the potential for capital appreciation that has historically exceeded other asset classes over the long term. Many university endowments and other institutional investors allocate about 10% of their portfolio to farmland and private agriculture investments. It's now possible for retail investors to do the same via online platforms.