What Is an Alternative Investment?

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

Understanding Alternative Investments

Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk. Many alternative investments have high minimum investments and fee structures, especially when compared to mutual funds and exchange-traded funds (ETFs). These investments also have less opportunity to publish verifiable performance data and advertise to potential investors. Although alternative assets may have high initial minimums and upfront investment fees, transaction costs are typically lower than those of conventional assets due to lower levels of turnover.

Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple Inc. due to a limited number of buyers. Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare. For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist and only one can be legally owned.

Regulation of Alternative Investments

Even when they don’t involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to the lack of regulations.

Alternative investments are often subject to a less clear legal structure than conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their practices are subject to examination by the U.S. Securities and Exchange Commission (SEC). However, they usually don’t have to register with the SEC. As such, they are not overseen or regulated by the SEC as are mutual funds and ETFs.

So, it is essential that investors conduct extensive due diligence when considering alternative investments. In some cases, only accredited investors may invest in alternative offerings. Accredited investors are those with a net worth exceeding $1 million—not counting their primary residence—or with an annual income of at least $200,000 (or $300,000 combined with a spousal income). Financial professionals who hold a FINRA Series 7, 65, or 82 license may also qualify as an accredited investor.

Strategy for Alternative Investments

Alternative investments typically have a low correlation with those in standard asset classes. This low correlation means they often move counter to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.

Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfolios—typically less than 10%—to alternative investments such as hedge funds.

The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded funds—also called alt funds or liquid alts—are now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and regulated, specifically by the Investment Company Act of 1940.

Example of Alternative Investments

Just being regulated does not mean that alt funds are safe investments. The SEC notes, “Many alternative mutual funds have limited performance histories.”

Also, although its diversified portfolio naturally mitigates the threat of loss, an alt fund is still subject to the inherent risks of its underlying assets. Indeed, the track record of ETFs that specialize in alternative assets has been mixed.

For example, as of January 2022, the SPDR Dow Jones Global Real Estate ETF had an annualized five-year return of 6.17%. In contrast, the SPDR S&P Oil & Gas Exploration & Production ETF posted a return of –6.40% for the same period.

What Are China A-Shares?

China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, China A-shares were only available for purchase by mainland citizens due to China’s restrictions on foreign investment.

However, since 2003, select foreign institutions have been able to purchase these shares through the Qualified Foreign Institutional Investor (QFII) system. Established in 2002, the QFII program allows specified licensed international investors to buy and sell on mainland China’s stock exchanges.

A-shares are also known as domestic shares because they use the Chinese renminbi (RMB) for valuation.

China A-Shares vs. B-Shares

China A-shares are different from B-shares. A-shares are only quoted in RMB, while B-shares are quoted in foreign currencies, such as the U.S. dollar, and are more widely available to foreign investors. Foreign investors may have difficulty accessing A-shares because of Chinese government regulations, and Chinese investors may have difficulty accessing B shares most notably for currency-exchange reasons. Some companies opt to have their stock listed on both the A-shares and B-shares market.

Due to the limited access of Chinese investors to B-shares, the stock of the same company often trades at much higher valuations on the A-shares market than on the B-shares market. Although foreign investors may now invest in A-shares, there is a monthly 20% limit on repatriation of funds to foreign countries.

The Shanghai Stock Exchange (SSE) publishes the key performance index for A-shares, known as the SSE 180 Index. In composing the index, the exchange selects 180 stocks listed on the SSE. The selection is diversified between sector, size, and liquidity to ensure adequate representation. Thus, the index’s performance benchmark reflects the overall situation and operation of the Shanghai securities market.

History of China A-Shares

Since its inception in 1990, including a major reform in 2002, the index has seen great fluctuations. However, it has grown along with the Chinese economy. The years 2015 to 2016 were a particularly difficult period, with a 52-week performance of -21.55% as of July 20, 2016.

As China grows from an emerging market to an advanced economy, there is substantial demand for Chinese equity. Stock exchange regulators continue efforts to make A-shares more broadly available to foreign investors and have them recognized by the global investing community.

In June 2017, the MSCI Emerging Markets Index announced a two-phase plan in which it would gradually add 222 China A large-cap stocks. In May 2018, the index began to partially include China large-cap A shares, which make up 5% of the index. Full inclusion would make up 40% of the index.

It is important for countries such as China to open their markets to global investors to stay competitive and thrive economically. China A-shares provide an alternative investment for those interested in trading in Chinese securities.

What Is Annual Turnover?

Annual turnover is the percentage rate at which something changes ownership over the course of a year. For a business, this rate could be related to its yearly turnover in inventories, receivables, payables, or assets.

In investments, a mutual fund or exchange-traded fund (ETF) turnover rate replaces its investment holdings on a yearly basis. Portfolio turnover is the comparison of assets under management (AUM) to the inflow, or outflow, of a fund’s holdings. The figure is useful to determine how actively the fund changes the underlying positions in its holdings. High figure turnover rates indicate an actively managed fund. Other funds are more passive and have a lower percentage of holding turnovers. An index fund is an example of a passive holding fund.

Calculating Annual Turnover

To calculate the portfolio turnover ratio for a given fund, first determine the total amount of assets purchased or sold (whichever happens to be greater), during the year. Then, divide that amount by the average assets held by the fund over the same year.


$\begin{aligned}&\text{portfolio turnover}\ =\ \frac{\operatorname{max}\begin{cases} \text{fund purchases}\\ \quad \text{fund sales}\end{cases}}{\text{average assets}}\end{aligned}$​portfolio turnover = average assetsmax{fund purchasesfund sales​​​

For example, if a mutual fund held $100 million in assets under management (AUM) and $75 million of those assets were liquidated at some point during the measurement period, the calculation is:


$\begin{aligned}&\frac{\$75\text{m}}{\$100\text{m}}=0.75\\&\textbf{where:}\\&\text{m}=\text{million}\end{aligned}$​$100m$75m​=0.75where:​

It is important to note that a fund turning over at 100% annually has not necessarily liquidated all positions with which it began the year. Instead, the complete turnover accounts for the frequent trading in and out of positions and the fact that sales of securities equal total AUM for the year. Also, using the same formula, the turnover rate is also measured by the number of securities bought in the measurement period.

Annualized Turnover in Investments

Annualized turnover is a future projection based on one month—or another shorter period of time—of investment turnover. For example, suppose that an ETF has a 5% turnover rate for the month of February. Using that figure, an investor may estimate annual turnover for the coming year by multiplying the one-month turnover by 12. This calculation provides an annualized holdings turnover rate of 60%.

Actively Managed Funds

Growth funds rely on trading strategies and stock selection from seasoned professional managers who set their sights on outperforming the index against which the portfolio benchmarks. Owning large equity positions is less about a commitment to corporate governance than it is a means to positive shareholder results. Managers who consistently beat the indices stay on the job and attract significant capital inflows.

While the passive versus active management argument persists, high volume approaches can realize moderate success. Consider the American Century Small Cap Growth fund (ANOIX), a four-star-rated Morningstar fund with a frantic 141% turnover rate (as of February 2021) that outperformed the S&P 500 Index considently over the last 15 years (through 2021).

Passively Managed Funds

Index funds, such as the Fidelity 500 Index Fund (FXAIX), adopt a buy-and-hold strategy. Following this system, the fund owns positions in equities as long as they remain components of the benchmark. The funds maintain a perfect, positive correlation to the index, and thus, the portfolio turnover rate is just 4%. Trading activity is limited to purchasing securities from inflows and infrequently selling issues removed from the index. More than 60% of the time, indices have historically outpaced managed funds.

Also, it is important to note, a high turnover rate judged in isolation is never an indicator of fund quality or performance. The Fidelity Spartan 500 Index Fund, after expenses, trailed the S&P 500 by 2.57% in 2020.

Annual Turnover in Business: Inventory Turnover

Businesses use several annual turnover metrics for understanding how well the business is running on a yearly basis. Inventory turnover measures how fast a company sells inventory and how analysts compare it to industry averages. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing. A high ratio implies either strong sales or insufficient inventory. The former is desirable while the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when shortages are anticipated.

The speed at which a company can sell inventory is a critical measure of business performance. Retailers that move inventory out faster tend to outperform. The longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to return to the shop for new items.

What Is an Automated Teller Machine (ATM)?

An automated teller machine (ATM) is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Anyone with a credit card or debit card can access cash at most ATMs, either in the USA or abroad.

ATMs are convenient, allowing consumers to perform quick self-service transactions such as deposits, cash withdrawals, bill payments, and transfers between accounts. Fees are commonly charged for cash withdrawals by the bank where the account is located, by the operator of the ATM, or by both. Some or all of these fees can be avoided by using an ATM operated directly by the bank that holds the account. Using an ATM abroad can cost more than using one in the USA.

ATMs are known in different parts of the world as automated bank machines (ABMs) or cash machines.

Understanding Automated Teller Machines (ATMs)

The first ATM appeared at a branch of Barclays Bank in London in 1967, though there are reports of a cash dispenser in use in Japan in the mid-1960s. The interbank communications networks that allowed a consumer to use one bank’s card at another bank’s ATM followed in the 1970s.

Within a few years, ATMs had spread around the globe, securing a presence in every major country. They now can be found even in tiny island nations such as Kiribati and the Federated States of Micronesia.

Types of ATMs

There are two primary types of ATMs. Basic units only allow customers to withdraw cash and receive updated account balances. The more complex machines accept deposits, facilitate line of credit payments and transfers, and access account information.

To access the advanced features of the complex units, a user often must be an account holder at the bank that operates the machine.

Analysts anticipate ATMs will become even more popular and forecast an increase in the number of ATM withdrawals. ATMs of the future are likely to be full-service terminals instead of or in addition to traditional bank tellers.

ATM Design Elements

Although the design of each ATM is different, they all contain the same basic parts:

• Card reader: This part reads the chip on the front of the card or the magnetic stripe on the back of the card.
• Keypad: The keypad is used by the customer to input information, including personal identification number (PIN), the type of transaction required, and the amount of the transaction.
• Cash dispenser: Bills are dispensed through a slot in the machine, which is connected to a safe at the bottom of the machine.
• Printer: If required, consumers can request receipts that are printed out of the ATM. The receipt records the type of transaction, the amount, and the account balance.
• Screen: The ATM issues prompts that guide the consumer through the process of executing the transaction. Information is also transmitted on the screen, such as account information and balances.

Full-service machines now often have slots for depositing paper checks or cash.

How to Use an ATM

Banks place ATMs inside and outside of their branches. Other ATMs are located in high-traffic areas such as shopping centers, grocery stores, convenience stores, airports, bus and railway stations, gas stations, casinos, restaurants, and other locations. Most ATMs that are found in banks are multifunctional, while others that are off-site tend to be primarily or entirely designed for cash withdrawals.

ATMs require consumers to use a plastic card—either a bank debit card or a credit card—to complete a transaction. Consumers are authenticated by a PIN before any transaction can be made.

Many cards come with a chip, which transmits data from the card to the machine. These work in the same fashion as a bar code that is scanned by a code reader.

ATM Fees

Account holders can use their bank’s ATMs at no charge, but accessing funds through a unit owned by a competing bank usually incurs a fee. According to MoneyRates.com, the average total fees to withdraw cash from an out-of-network ATM was $4.55 as of 2022.

Some banks will reimburse their customers for the fee, especially if there is no corresponding ATM available in the area.

So, if you’re one of those people who draws weekly spending money from an ATM, using the wrong machine could cost you nearly $240 a year.

ATM Ownership

In many cases, banks and credit unions own ATMs. However, individuals and businesses may also buy or lease ATMs on their own or through an ATM franchise. When individuals or small businesses such as restaurants or gas stations own ATMs, the profit model is based on charging fees to the machine’s users.

Banks also own ATMs with this intent. They use the convenience of an ATM to attract clients. ATMs also take some of the customer service burdens from bank tellers, saving banks money in payroll costs.

Using ATMs Abroad

ATMs make it simple for travelers to access their checking or savings accounts from almost anywhere in the world.

Travel experts advise consumers to use foreign ATMs as a source of cash abroad, as they generally receive a more favorable exchange rate than they would at most currency exchange offices.

However, the account holder’s bank may charge a transaction fee or a percentage of the amount exchanged. Most ATMs do not list the exchange rate on the receipt, making it difficult to track spending.

The Bottom Line

ATM stands for automated teller machine. These are electronic banking outlets that allow people to complete transactions without going into a branch of their bank. Some ATMs are simple cash dispensers, while others allow a variety of transactions such as check deposits, balance transfers, and bill payments. The first ATMs appeared in the mid- to late 1960s and have grown in number to more than 2 million worldwide.