What are the Different Types of High-Return Investments?

Geri Terzo

Investors both large and small who pour money into the financial markets would like to earn the biggest returns on their investment. Although there are no guarantees when investing in the markets, whether the investments are in stocks or bonds, there are some high-return investments that require some risk-taking but can deliver returns, or profits, that are more generous than what traditional investments historically produce. Such investments might include high-yield bonds and hedge funds.

The more risky an investment strategy is, the better the chances for high returns.
The more risky an investment strategy is, the better the chances for high returns.

There are many different types of high-return investments. Usually, the more risky or complex an investment strategy is, the better the chances for high returns. High-yield bonds are just one type of high-return investments, and these securities are in the fixed income asset class.

Something to consider is that high-yield bond issuers have a greater chance of defaulting on their loans versus higher-quality bond issuers. The way that the likelihood of default is known is that bond investments typically have a rating assigned to them. Investments that are graded as non-investment grade, below investment grade or junk bonds are the riskiest types.

If the bond issuer or the entity responsible for repaying the bond loan goes into default, there is no guarantee that investors will be compensated for the original loan. On the other hand, high-yield bonds also include a greater chance for yielding profits that exceed those of higher-quality bonds that are not in danger of default. An investor can anticipate the types of returns that they might earn from a junk bond in a best-case scenario based on the interest rate or yield that is assigned to the bond by the issuer — rates that are higher in nature then traditional bond yields are.

Hedge funds are another type of investment built for high returns. Specifically, these investment vehicles are meant to produce profits that exceed those of the broader financial markets where most traditional investors invest. This is known as generating alpha. Hedge fund managers use complex trading strategies in order to create a scenario in which the investor can achieve the most attractive returns. In this way, hedge funds are designed to be high-return investments.

An investor should be aware of how much money he or she can stand to lose before selecting high-return investments. This is because even though high-return investments are designed to win big, if the investment strategy fails, the investment will become a losing proposition. A formula known as a risk/return profile is a measure of how much risk an investor can afford to take on and the types of returns that are expected.

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