Our aim is to be the authority on all forms of alternative investments.
What is an alternative investment?
This is quite an expansive question and can incorporate a really wide range of asset types. In essence, an alternative investment is any investment that is not one of the three traditional asset types (stocks, bonds and cash).
The world of alternative investments is a murky one. Whilst the potential rewards are often high, most areas are completely unregulated and highly illiquid, as such the risks can be quite high.
As with any investment type, there are legitimate opportunities but there are also scams. See our guide to common investment scams and how to avoid them.
Our aim is to guide you through the various alternative investment types out there so you can make an informed choice. We do not offer advice, merely information and you are advised to seek professional counsel before committing any funds.
If you trade in stocks, bonds or cash investments, these are regarding as the three traditional asset types.
Most of us with money to invest will predominantly have trusted our money to a combination of these three investment opportunities, but when your wealth increases and you decide to seek more diverse openings and prospects for growing your money, you will probably want to explore the world of alternative investments.
The basic definition of an alternative investment is an asset that is more complex in nature than simply owning stocks and shares that you can buy and sell based on their current price.
High net-worth individuals and more adventurous investors like the idea of greater diversity in their investment strategy and as a feature of many alternative investments is limited financial regulation and a potential lack of liquidity, the increased risk-reward environment is attractive.
We will look at the various alternative investment opportunities in greater detail and you can find a section on this website that deals with each one, so that you can learn about any specific type of investment that particularly appeals to you.
To get a flavor of what an alternative investment is, we are talking about real estate investments, commodities and derivatives contracts and hedge funds, amongst others.
Many alternative investments tend to have a reasonably high minimum investment requirement and the fee structures quoted by the provider will often be at a higher level than you would expect to pay if your money was invested in a mutual fund or an ETF.
It should be remembered that whilst the fact that many of these alternative investments are subject to much less regulation in comparison to traditional asset-based investments, the downside to that is the lack of verifiable performance data available in which to attract potential investors in the usual way with examples of how well they have done in the past (without of course, being able to guarantee what is going to happen to your money in the future)
A fair number of the large institutional funds such as pension providers have started to allocate a relatively small proportion of their portfolio to alternative investments such as hedge funds. Their thinking behind this is that alternative investments can be viewed favorably as their returns are not underpinned by those of standard asset classes. The higher risk and reward scenario is understandably attractive to these large funds as they seek out opportunities to diverse, but they tend to limit their total exposure to alternative investments to a figure somewhere below 10% of their total portfolio.
If you are looking at different ways of getting your money to work harder for you, alternative investments are well worth considering if they are a good fit to your financial position and risk profile.
What are the risks of alternative investments?
When you consider that there are an estimated 10,000+ alternative investment opportunities available in the form of hedge funds, private equity funds and real estate and infrastructure funds, there are going to be risks attached and some performance volatility to contend with.
Fee structures with many alternative investments work on what is often referred to as a 2 and 20 fee structure. This means that you will be charged a 2% annual management fee and a commission rate of 20% if the fund exceeds a certain return threshold. The risk is that high fees can eat into your capital invested if the fund performs badly or not well enough to justify the commission rate that will be sliced off the value when it is due.
As some alternative investments are more complex in nature and fund managers invest in a variety of investments such as derivatives and also utilize short selling strategies, this can make due diligence more challenging.
Other risks to consider include the potential lack of liquidity in some investments, which means you may not be able to get all of your money out when you want to. There is also a lower level of transparency with some funds to be aware of, which means you can’t compare funds as easily as you can with more traditional investments.
What are the rewards?
The principal reason why investors are tempted to consider putting their money into alternative investments, is the prospect of higher returns.
There is definitely the potential for alternative investments to outperform traditional investment vehicles and another positive benefit is the fact that you are diversifying exposure away from traditional fixed income and equity assets for part of your portfolio.
Higher risks can lead to higher rewards and alternative investments can offer investors the path to making the most of their money and the diverse opportunities that exist.