What it is:
An alternative asset is an item that has intrinsic value, but is not traditionally considered a financial asset.
How it works (Example):
Alternative assets are best defined by their absence from the capital markets. Their valuation is subjective and based primarily on popular demand. Classic examples of alternative assets include works of art, antiques, collectors' items and coins.
Why it Matters:
Alternative assets are a useful diversification tool. Unaffected by movements in the capital markets, their values generally grow over long periods of time. This means that they are characterized by low liquidity. This, combined with the subjective nature of their valuation, makes them difficult to incorporate as part of a traditional investment portfolio.
Alternative assets can be a great hedge for investors heavily involved in the stock markets since they're not tied to Wall Street's ups and downs. For example, the value of fine wine has gained +75% during the last 15 years, while the Dow Jones Industrial Average has remained flat!