Alternative Investments

Alternative investments, at least in some form, have been around for many years and are well known to some investors. Remember, when exploring alternative investments, it’s just as  important to look at how they can protect your wealth, as well as  on what return they may give you on it. They have traditionally been the reserve of ultra high net worth individuals and institutional investors who have long known their worth, but are becoming more common in the portfolio of any HNW serious and sophisticated investors.

For example, venture capital, as we know it, has been around since the 1950s. The private equity sector, has been historically tied to leveraged buyouts, and has even featured in movies like ‘Wall Street’ back in the eighties. Other asset classes, however, are relatively new, and alternative investment opportunities have grown in line with rising demand, and the possibilities today are myriad.

The major alternative investment examples include loan notes, PPL’s, REITS, cryptocurrencies, forex, commodities, high end property, corporate bonds, gold, peer-to-peer lending and even things like fine art, wine, cars, diamonds et al.

Why alternative investments are favoured by intelligent, sophisticated investors

Investment portfolios are built to maximise yield while minimising risk. This can be achieved by combining various asset classes with little or negative correlation to each other. Diversification is a key investment concept, because diversification isn’t just about creating wealth – it is also about preserving wealth. In short, it acts as a risk reduction strategy.

The chief benefit of adding alternative assets to a portfolio is their low correlation to traditional assets. They also often generate higher returns as these assets are sometimes fairly illiquid and less regulated. Furthermore, alternatives can also benefit from an economic downturn, a rising currency, volatility or inflation. Gold, as an example, ticks all of those boxes and is commonly viewed as a “safe haven” asset.

Depending on your circumstances, alternatives can also offer some lucrative tax benefits.

A report by a leading global investment firm, KKR, reveals a typical global pension plan and a typical HNW account has a 24 per cent and a 22 per cent allocation to alternatives.

A recent alternative investment trend has been the emergence of new alternative assets as well as liquid alternatives, ETFs and mutual funds and these financial products have opened the asset class to many retail investors.

What are the pros and cons of alternative investments?

Some of the advantages and risks associated with alternative investments are as follows:

Advantages:

• Returns uncorrelated to traditional asset classes.
• Potential for significantly higher returns.
• Tax benefits – depending on your personal circumstances.
• Reduced volatility and exposure to recessionary econonomic cycles.

Potential risks to look out for:

• Potential lack of liquidity.
• Price discovery. In such markets with fewer buyers and sellers establishing a fair price for an asset can be challenging.
• Less regulation can mean less investor protection.
• Potentially higher investment costs.

What are the most popular types of alternative investments?

Ultra high net worth investors, family offices, pension funds and large institutional investors, are investing in such alternative investments as hedge funds, private equity funds and ‘real’ assets.

As you probably know hedge funds and private equity funds are financial structures that pool together funds from canny investors to take advantage of market opportunities.  As of last year, 2019, hedge funds managed approximately $3.2 trillion for investors.

Private equity funds invest in private businesses. Venture capital and ‘angel investing’ is a subset of private equity associated with early-stage investments in new companies just starting up.

Real assets are quite different from either of the above. These are physical assets like real estate, infrastructure, physical commodities or natural resources. Real assets, especially infrastructure, have seen significant growth over the last few years.

They are popular with sophisticated investors, but can be potentially difficult to access for the average investor. All investors should do their due diligence before getting involved! That’s where we can be an invaluable guide.

Other types of alternative investments include peer-to-peer lending. P2P platforms bring together lenders and borrowers, using various algorithms to assess borrowers’ credit and set conditions for a loan.

Real estate investments, whether commercial or residential, usually have stable cash flows and less exposure to the real economy. Why? because even in an economic downturn, most people will continue paying their rent. ‘Crowdfunding’ platforms pool funds from many small investors to buy a residential or commercial property. The management of the fund then manages that property, generating income that is paid out to the individual investors.

Investing in art, wine, cars or suchlike requires some  expertise in those sectors. An advantage of  these types of alternative investments is that it is not correlated with any major asset class. Choose wisely!

Cryptocurrencies

Cryptocurrencies are an exciting industry that has been emerging at a rapid pace over the past 10 years or so. Bitcoin was the best performing asset worldwide, a  clear winner for investors last year, roughly doubling in 2019. By April 2020, there were around 5,430 digital coins and tokens available. Please note that not all of them will survive and shine like the sectors most prominent names Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP). Society is moving inexorably toward a cashless future but what that future looks like is unknown. Cryptos remain highly speculative while the basis of their value and utilisation is unclear and the regulatory framework under which they operate. However, the technology is not in question and the sector provides fantastic investment opportunities precisely because of the volatility caused by these uncertainties. Investing in and understanding the technologies behind the sector will place you at the forefront of a historic revolution in how value is exchanged within society. 

The promise of a decentralised world currency is what makes cryptocurrencies intriguing. At the moment, however, the outlook for digital money is still quite challenging. For that, while they present high reward investment opportunities, they come with a very high risk.

Forex

The foreign exchange market, forex or FX is a global decentralised market dedicated to currency trading. It is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.

Currency traders include governments and central banks, commercial banks, other financial institutions as well as institutional investors, commercial corporations, currency speculators and individuals. Trades between these market participants can be extremely large, involving hundreds of millions of dollars.

Retail investors engaged in the forex market are buying and selling different currency pairs in order to profit from their price fluctuations. These investments can be leveraged – but this means higher returns but higher risk and exposure.

Are alternative investments right for you?

There is no such thing as a “100% safe investment”, but alternative investments are usually considered an excellent addition to any investment portfolio. We highly recommend you to do extensive research and gather as much knowledge as possible before investing. We can help here.

See some examples we highly recommend below:

Some Alternative Investments that meet the criteria you are looking for:

To protect your wealth, to diversify your portfolio, to hedge against volatility and inflation, to increase your tax efficiency and gain yeild.

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