Alternative investments are everything outside traditional stocks, bonds, and cash. This includes private equity, hedge funds, real estate, commodities, infrastructure, art, wine, and even collectibles like rare sneakers. They offer diversification benefits because they often move independently of stock markets.
Major categories: hedge funds ($4.5 trillion AUM) use complex strategies; private equity ($8 trillion) buys and improves companies; real estate ($12 trillion) generates rental income plus appreciation; commodities (gold, oil) hedge against inflation.
Alternatives have grown from 6% of institutional portfolios in 2000 to over 30% today. Yale's endowment pioneered this shift under David Swensen, earning 13.7% annually over 30 years. However, alternatives typically require high minimums ($250,000+), are illiquid, and charge higher fees. New platforms are democratizing access with lower minimums.