What are alternative investments?

Are you bored of bonds and tired of the same equity investments? Would you like some different longer-term options to inspire your overall portfolio? Well, one option is considering the world of alternative investments. They have been adding some much-needed extra spice to portfolios for decades.

But what exactly are they and should you consider getting involved? Are they worth your time and money – or are they just too complicated and best left to the professionals?

Here we take a look at this growing area, define what is meant by alternative, highlight the pros and cons, and suggest the role they can play in your future.

What are alternative investments?

The phrase ‘alternative investment’ is effectively an umbrella term for anything that can’t fit neatly into either equities, bonds or cash holdings. It includes a wide variety of natural resources, infrastructure and global real estate assets, as well as hedge funds, private capital and even cryptocurrencies.

While some are pretty mainstream and suitable for private investors, such as commodities, others such as the fledgling crypto universe are certainly not for everyone.

It’s worth pointing out at this stage that the alternatives world is very broad, with assets often being traded far less than traditional products. For example, this area can include assets as left field as classic cars or wine, the demand for which will heavily influence their value.

What are the benefits?

The reasons why alternatives may be attractive to investors include boosting returns, generating income, and providing a greater degree of diversification. The potential to enjoy a different type of return than you’d ordinarily receive from more traditional investments is the biggest potential benefit.

The hope is that at the same time stock markets take a tumble, uncorrelated alternative assets could be enjoying something of a purple patch and be delivering positive returns. There is also the lure of having exposure to a different sector or part of the world to most people, along with the seductive prospect of bumper returns if they outperform.

This can be more exciting and interesting then putting every penny into a fund that invests in stable, reliable large capitalisation companies. However, they’re not for everybody…

Are there drawbacks?

Yes, there are potential problems that you need to bear in mind. By their very nature, alternative investments are not exactly mainstream. This means there probably won’t be as many analysts and fund managers covering the area. As a result, there’s a greater chance of them surprising on the downside as well as the upside.

The returns generated may also be affected by completely different factors than would usually influence an equity investment on the stock market.

As well as being riskier, they can also be more complicated than more mainstream assets, which means they’re often favoured by more professional investors. For example, some alternative investments will make use of more sophisticated tools and approaches, including short selling and leverage.

Should you consider them?

This is not an easy question to answer. It all depends on your investment objectives, attitude to risk, and existing holdings in your portfolio.

Generally, alternative investments should account for a relatively small part of an investor’s overall portfolio. In many cases they will act as ‘satellite’ holdings around a more stable core.

Investors must do their homework before committing money into any of these areas in order to understand exactly what they’re buying.

Of course, there is a slightly simpler option for those wanting to dip their toes in the alternative waters before committing themselves. Many multi-asset investment funds will have a certain percentage in so-called alternatives, so it’s worth analysing such portfolios to see where their money is invested.

Research Elite Rated Multi-asset funds here.

How do you pick an alternative?

The first step is deciding what type of ‘alternatives’ you’re interested in. Is it commodities? Are you intrigued by infrastructure? Do you have a strong allure to global real estate?

Then it’s all about doing your research. Find out as much as you can about the topic and the leading companies or funds in these areas. The more knowledge you have, the better your chances of enjoying success.

_{Photo by Alexander Grey on Unsplash}