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Investment Products

Alternative and Emerging Products



  • Alternative and emerging investment products tend to be inherently complex because they often involve novel, complicated or intricate features that can make them hard to understand and evaluate.
  • These products often come with unique risks, although this doesn’t always translate into more risk. For instance, while the performance of some products (leveraged products in particular) might result in dramatic declines or the complete loss of your investment, other products can help limit risk through protection against loss of principal.
  • Goals associated with these investments are not always performance driven. For example, a goal might be to limit loss or smooth volatility rather than generate return.
  • Avoid overconcentration of alternative and emerging products. They tend to be used to supplement traditional investments, not replace them.

Investors have numerous alternatives to conventional stock and bond investments. These products are sometimes referred to as alternative, emerging, complex, structured or non-conventional investments. The availability of these products can potentially expand investment opportunities and might offer favorable investment outcomes such as enhancing returns, limiting losses or improving diversification.

However, these products often combine features of multiple products and strategies, making it difficult to understand the essential characteristics and risks. For instance, it can be hard to know the circumstances under which an investment might make money (sometimes referred to as a “payout structure”) or lose money. As a result, misunderstandings and problems can arise. In addition, many of these products are relatively new and have a limited track record of performance or achieving the goals and objectives they were designed to accomplish.

Although these products might have attractive qualities, including the opportunity to diversify or protect against losses, it’s crucial to understand each investment’s distinct features, risks and rewards.

Investors should also be aware that there’s no formal definition of an alternative, complex or emerging product. Nor is there a uniform set of regulatory requirements under federal securities laws governing these products.

More Info? Check out the Securities and Exchange Commission’s Joint Statement Regarding Complex Financial Products and Retail Investors.

Here are some types of alternative and emerging products that you may come across.

Alternative Funds

As their name implies, alternative mutual funds (sometimes referred to as “liquid alts,” among other names) seek to accomplish the fund's objectives through non-traditional investments and trading strategies. Alt funds might invest in assets such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash. Alt funds can be pricy relative to their traditional managed fund peers. Learn more with FINRA’s Fund Analyzer.

Defined-Outcome Exchange-Traded Funds (ETFs)

For investors looking to manage volatility, defined-outcome ETFs, also called “buffer ETFs,” generally offer protection from some percentage of market losses (the “buffer”) while capping market gains over a specified period. The “defined-outcome” refers to a performance range, and the period is usually one year, after which time the outcome period and exposure reset.

Equity-Indexed and Structured Annuities

Equity-indexed annuities (EIAs), also known as "fixed-indexed insurance products" and "indexed annuities," are complex financial instruments that have characteristics of both fixed and variable annuities.

Structured annuities, which can also be referred to as buffered annuities or registered index-linked annuities (RILAs), typically use market indexes to give investors the ability to set a minimum index loss (floor) and a capped index gain. This “buffer” is designed to limit losses and, as a tradeoff, often caps gains.

Be prepared to ask your insurance agent or other financial professional lots of questions about whether an EIA or structured annuity is right for you.

High-Yield Bonds

High-yield or junk bonds typically offer a higher rate of return than investment-grade bonds, but the higher yield comes with increased risk—specifically, the risk that the bond’s issuer might default. Learn more about bond default and credit risk.

Insurance-Linked Securities

Insurance-linked securities (ILS) are financial instruments that allow investors to speculate on a variety of events, including catastrophes such as hurricanes, earthquakes and pandemics. ILS may offer higher interest rates than similarly rated corporate bonds. But, if a triggering catastrophic event occurs, holders can lose most or all their principal and unpaid interest payments. One common type of ILS is “catastrophe bonds," or "cat bonds."

Interval Funds

Interval funds, or tender-offer funds, are a type of Investment Company Act of 1940 closed-end fund that continuously offers new shares for sale but only buys back existing shares during specific periods (intervals). These funds, most of which do not trade on an exchange, can provide individual investors with access to exotic or alternative investments typically limited to hedge funds and other institutional investors. But interval funds come with their own set of risks, including lack of liquidity. Interval fund fees and expenses also tend to be higher than other closed-end funds and mutual funds.

Leveraged and Inverse Exchange-Traded Products (ETPs)

Leveraged and inverse ETPs, sometimes referred to as “geared” or “non-traditional” ETPs, don’t work the same way as the average ETF or exchange-traded note (ETN) and have unique risks. Leveraged ETPs seek to deliver multiples of the performance of the index, benchmark or individual stock they track. Inverse ETPs, also sometimes called "short" funds, seek to deliver the opposite of the performance of the index, benchmark or individual stock they track.

Inverse ETPs often are marketed as a way for investors to profit from, or at least hedge their exposure to, downward moving markets. Most geared ETPs "reset" their exposure every day, which means they are only designed to accomplish the stated leveraged or inverse objective on a daily basis. This can make the products risky long-term—or even medium-term—investments.

Private Placements

A private placement is an offering of unregistered securities to a limited pool of investors. In a private placement, a company sells shares of stock in the company or other interest in the company, such as warrants or bonds, in exchange for cash.

Private placements are regulated by a series of Securities and Exchange Commission (SEC) rules known as Regulation D, or Reg D. Among other things, the Reg D rules mandate that private placements may only be sold to accredited investors possessing sufficient net worth and a limited number of sophisticated non-accredited investors. Issuers selling securities in a private placement generally have fewer disclosure requirements than issuers that sell securities in a public offering.

Real Estate Investment Trusts (REITs)

REITs, which are companies that own or finance income-producing real estate, give investors an opportunity to gain exposure to real estate without having to buy or sell property themselves.

There are multiple types and classifications of REITs, including publicly traded REITs, which are bought and sold by investors on national securities exchanges, public non-traded REITs and private REITs, sometimes called private placement REITs. Unlike public REITS, private REITS are not subject to SEC regulations. REIT mutual funds and exchange-traded funds (ETFs) provide another avenue for investors seeking diversification through real estate exposure.

The complexity, costs and risks of REIT products vary. Understand the differences in order to choose investments that meet your objectives.

Reverse Convertibles

Also known as "revertible notes" or "reverse exchangeable securities", reverse convertibles are debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities. Although often described as debt instruments, they're far more complex than a traditional bond and involve elements of options trading.

Structured Notes With Principal Protection

The term "structured note with principal protection" generally refers to any structured note whose payoff reflects some combination of a bond with a derivative component—and that offers a full or partial return of principal at maturity. Structured products in general do not represent ownership of any portfolio of assets but rather are promises to pay made by the product issuers. You generally must hold these products until maturity to receive the specified principal protection, and these products may have hidden costs that can be relatively high and difficult to understand.

Given the variety of alternative and complex investment products available, it should come as no surprise that risks will vary from one product to another. A product’s risks tend to be outlined in disclosure documents (prospectuses and offering circulars) and in sales literature. Reading and understanding these documents and the disclosed risks is important to do before you make any investment.

Here are some of the risks you might encounter with these investments:

Liquidity Risk

As is the case with virtually all structured products and many high-yield bonds, secondary trading, which is your ability to trade out of the product, is generally limited. That means the products can be illiquid, and you may be unable to sell or only able to do so at a significant loss.  

Strategy Risk

Some products, such as alt funds, carry additional risks from the strategies they use. For example, market-neutral funds tend to have significant portfolio turnover risk that can result in higher costs. Similarly, a distressed bond fund is likely to have significant credit risk.

Performance Risk

Many of these products offer the potential for better performance (higher returns) than traditional investments. However, the risk/return relationship bears repeating: With the promise of higher returns comes higher risk.

Concentration Risk

No matter how appealing an investment might be, it’s important to stay diversified, not only across and within the major asset classes, but also across a variety of investment products—especially if those products might be new to you. Alternative and emerging products are generally used to supplement traditional investments.

Disclosure Risk

Certain products, such as private placements, may have fewer disclosure obligations than more traditional investments, which can translate into limited information for investors.

In addition, because fees are often high with alternative and emerging products, they can erode, and even evaporate, gains. Make sure you understand all costs and fees before you invest.