Mortgage REITs vs Hedge Funds vs Cryptocurrency as Alternative Investments

Mortgage REITs, hedge funds, and cryptocurrency have become popular options for those seeking alternative investments.

Marquee Funding Group understands the importance of carefully considering the pros and cons of each investment avenue.

Whether you’re a seasoned investor or just beginning to explore alternative investment opportunities, this guide will help you make informed decisions on alternative investments.

What are alternative investments?

Alternative investments are non-traditional assets that differ from stocks, bonds, and cash.

Examples of alternative investments include:

• Private equity
• Venture capital
• Real estate
• Commodities
• Hedge funds

These investments typically lack correlation with traditional markets, offering diversification benefits.

By investing in alternatives, we can potentially have a more balanced and resilient portfolio.

Benefits of alternative investments

One of the key benefits of alternative investments is their potential to deliver higher returns than traditional assets.

They also offer the opportunity to diversify and minimize overall portfolio risk.

Moreover, alternative investments provide a hedge against inflation and can act as a store of value during market downturns.

Additionally, they often have a low correlation with stock and bond markets, offering the potential for enhanced risk-adjusted returns.

What are mortgage REITs?

Mortgage Real Estate Investment Trusts (mREITs, private and otherwise) are companies that finance income-producing real estate by:

• Purchasing or originating mortgages
• Purchasing or originating mortgage-backed securities

They generate income through the interest on these investments and may also benefit from the potential appreciation of the underlying properties.

Advantages of mortgage REITs

Mortgage REITs offer attractive advantages for investors seeking regular income and portfolio diversification.

• They often provide high dividend yields, making them appealing for income-focused investors
• Additionally, they have the potential to perform well in different interest rate environments, offering a hedge against interest rate risk

Investing in mREITs can provide exposure to the real estate market without direct property ownership, offering liquidity and flexibility for investors.

Additionally, they can be a valuable addition to a well-rounded investment portfolio due to their historically low correlation with other asset classes.

Risks associated with mortgage REITs

Despite their advantages, mREITs also come with specific risks to consider.

• They’re sensitive to interest rate fluctuations, which can impact their profitability and stock prices
• Additionally, prepayment and default risks are inherent in the mortgage market and can influence the performance of mortgage REITs

Economic downturns or disruptions in the real estate market can also negatively impact the value of the underlying assets, affecting the dividends and returns of mREITs.

It’s always advisable for investors to conduct thorough research and assess their risk tolerance before including mREITs in their investment strategy.

Hedge funds as alternative investments

Hedge funds are actively managed funds that pool money from accredited investors to invest in various financial instruments such as:

• Stocks
• Derivatives
• Bonds

Unlike traditional investment funds, hedge funds have the flexibility to use advanced strategies, including short selling and leverage, to potentially generate higher returns.

They’re often managed by experienced fund managers who aim to outperform the market.

Pros and cons of hedge funds

Pros:

• Potential for high returns: Hedge funds have the potential to deliver high returns due to their active and flexible investment approach.
• Diversification: They offer diversification benefits by investing in various asset classes and employing different strategies.
• Hedging against market risks: Hedge funds may provide a hedge against market downturns through their ability to short-sell and use derivatives.

Cons:

• High fees: Hedge funds typically charge high management and performance fees, which can eat into investors’ returns.
• Complexity and risk: The advanced strategies used by hedge funds can introduce complexity and higher risk compared to traditional investment options.
• Limited liquidity: Investors in hedge funds often face limited liquidity, as they may have lock-up periods during which they cannot easily redeem their investments.

Overall, hedge funds can offer attractive opportunities—but often only for high-net-worth individuals seeking potentially higher returns and diversification. They also come with higher costs and risks that investors should carefully consider.

What about cryptocurrency as an investment?

Cryptocurrencies are digital or virtual forms of currency that use cryptography for “open” security and operate independently of a central bank.

Unlike traditional currencies, it relies on a decentralized system based on blockchain technology to conduct secure and anonymous transactions.

Advantages and risks of cryptocurrency

Cryptocurrencies offer several advantages as an investment option. They have the potential for high returns, especially during times of market volatility.

Additionally, they can serve as a hedge against inflation and currency devaluation.

Furthermore, cryptocurrencies can facilitate international transactions with lower fees and speedier processing times compared to traditional banking systems.

However, it’s essential to consider the risks associated with cryptocurrency investments:

• The markets that deal with cryptocurrencies are quite volatile, often leading to significant fluctuations in value over short periods
• Regulatory uncertainty, security vulnerabilities, and potential for fraudulent activities are also key risks

Private mortgage REITs, hedge funds, and cryptocurrency—how do they compare?

In comparing private mortgage REITs, hedge funds, and cryptocurrencies, we find distinct differences across various factors:

Risk-return profile

• Private mortgage REITs typically offer moderate risk with potentially attractive returns, appealing to those seeking balanced risk exposure
• Hedge funds, aiming for higher returns, carry increased risks due to their aggressive strategies
• Cryptocurrencies are known for their high volatility, offering the possibility of substantial returns but also significant risks

Liquidity

• Private mortgage REITs, not traded on public exchanges and primarily available to accredited investors, generally have lower liquidity
• Cryptocurrencies provide high liquidity with 24/7 trading
• Hedge funds are less liquid, often including lock-up periods

Regulation and oversight

• Private mortgage REITs are often exempt from SEC registration and most regulatory requirements, primarily targeting accredited investors
• Hedge funds, also catering to accredited investors, operate under less stringent regulations than traditional investments
• Cryptocurrencies, still emerging in regulatory frameworks, offer both opportunities and risks due to their lesser-regulated nature

Tax implications

• Investors in private mortgage REITs can benefit from pass-through taxation, where income is distributed to shareholders
• Hedge funds, on the other hand, have complex tax structures, potentially affecting overall tax liability
• Cryptocurrencies face tax implications based on capital gains from trading or mining activities

Alternative investments: Which one is right for you?

Considering alternative investments such as private mortgage REITs, hedge funds, and cryptocurrency means you must weigh the potential risks and returns. Each option carries its own set of advantages and drawbacks.

By carefully investigating the real estate market, investors often discover the stability and tangible asset value that private mortgage REITs can provide—adding a valuable dimension to their investment portfolio.