The simplest definition of an alternative investment is an investment other than the traditional idea of investing—stocks, bonds or money market accounts, for example. Specifically, alternative investments include a wide range of investment products, but are usually associated with hedge funds.

Alternative funds and investments aren't open to everyone, though; they're only for what's called "sophisticated investors." This is a narrow definition limited to individuals with at least $1 million in assets, or an income of over $200,000 a year for the past two years, and the expectation of the same during the current year. The alternative investments industry includes:

1. Hedge funds, one of the most popular alternative investments.

2. Venture capital.

3. Real estate.

4. Private equity.

Action Steps
The best contacts and resources to help you get it done

Study alternative investing through publications dedicated to the alternative investments industry

The definition of alternative investments varies among experts, and the concept is more complex than traditional forms of investing. The Internet is a great place to locate information about alternative funds, through online publications and websites that focus on the alternative investments market. At these sites, you can learn the basics of alternative investing, including who is eligible, which alternative investment businesses have the best reputation, and what you need to do to make savvy investing decisions.

I recommend: Get the inside track on alternative investing through Institutional Investor magazine's Alternative Investment Newsletter, or at the website for the Chartered Alternative Investment Analyst Association.

Research alternative investment companies before you invest

Private offerings, such as alternative investments, aren't regulated as closely as public offerings, in part because it's assumed that their 'sophisticated investors' are better able to choose good investments. With any investment, you want to do as much research as you can, but this is especially critical when choosing alternative investment firms. Ask plenty of questions, seek clarification on anything you don't understand, and check out the background of any alternative investment firms you're considering.

I recommend: Review the backgrounds of alternative investment companies through Hoovers, one of the most well-known online databases for researching public and private companies. The site also features listings for investment firms. Prudential, Sun Capital Partners and Fidelity are a few well-known alternative investment companies.

Make alternative investments a small portion of your investment portfolio

Alternative investments are riskier than traditional investments, but many investors are drawn to them by the promise of a significant return on their money. If alternative investing fits well with your current financial situation and future plans, try it out, but limit any single alternative investment to 10 to 15% of your portfolio. Or, choose an investment firm that specializes in traditional and alternative investing, who can guide you to the most diversified and productive portfolio.

I recommend: Uhlmann Price Securities offers both traditional and alternative investment solutions.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Investing in alternative funds is expensive, often requiring minimum investments of $100,000 to $250,000. Many funds require a minimum investment of $1 million or more, with some even up to $5 million or more. The fees at alternative investment businesses are also usually higher--a 1 to 2% management fee and 20% or more of the trading profits.