Alternative investments: much more than fine wine and baseball cards
Alternative investments span everything from hedge funds and private equity to fine wine and baseball cards. Read our deep dive into the industry
Alternative investments are often touted as an effective way of diversifying a portfolio – offering exposure to more traditional assets such as stocks, bonds and cash.
Some advocates of alternative investments argue that they can help investors withstand a downturn because they often have no correlation to the stock market. However, it’s fair to say that this is oversimplifying things. Alternative investments come with their own risks and downsides – and the barriers to entry for getting involved can be high.
Here, we’re going to explore the types of opportunities you may come across in this burgeoning sector, and the strategies investors rely upon to maximise their gains.
The alternative investment market: an overview
According to a 2018 report by Preqin, the volume of assets under management in the global alternative investments market is set to reach $14tn by 2023 – a 57 per cent rise on 2017. Several factors help explain why this sector is becoming more popular.
To begin with, let’s look at data from the World Bank. Back in 1996, there were approximately 8,090 listed domestic companies in the United States. Fast forward to 2018, and this figure has fallen precipitously to just 4,397. Initial public offerings are often an expensive affair – and many young businesses are starting to find that private capital is a viable way of financing aggressive growth instead.
Another driver of demand lies in how alternative investments have become more accessible to the public at large. Businesses that want to launch a product now often turn to crowdfunding to get to market more quickly – and in the crypto world, we’ve seen initial coin offerings and security token offerings develop into common methods for getting a company off the ground (albeit with mixed success). Peer-to-peer lending also deserves a mention here; platforms where individuals and businesses can borrow money from a willing pool of investors without the need for a bank.
A big downside to alternative investments lies in how it’s often difficult to determine their true value. Accurately assessing past performance can also be a challenge, as there may not be enough historical data to come to an informed conclusion. They often lack the regulation traditional financial instruments are subject to – and the asset in question might be illiquid, meaning it’ll be difficult to sell quickly or at all. That said, when done right, these assets can deliver healthy returns and offer protection against inflation.
Types of alternative investments
When you think of alternative investment to stocks, your mind may immediately wander to some of the more elaborate assets out there. A classic example is fine wine. This is a so-called “treasure asset” – alongside things such as rare coins, stamps and baseball cards – that many people invest in out of passion rather than a goal to make money.
Plundering your cash into a bottle of red may seem like an insane idea, but looking at the recent performance of fine wine indices makes for interesting reading. The Liv-ex Fine Wine 1000 has posted gains of 40.81 per cent over the past five years – and although this is by no means an indication of what will happen in future, it goes to show alternative investments can be a bright spot when returns are tepid elsewhere.
Moving away from Bordeaux and Champagne, alternative investments aren’t always as glamorous. Hedge funds are perhaps one of the better-known avenues into non-traditional markets, with managers often attempting to find market inefficiencies across a broader set of opportunities. Private equity – which as we explained is an alternative to going public – can mean companies have the financial backing to thing about their long-term development without having to worry about how their share price will react when quarterly earnings are issued. Exchange-traded funds can also deliver exposure to tangible assets such as real estate and commodities. Once the preserve of investors with hundreds of thousands of dollars to spare, real estate investment trusts mean it’s possible to have a stake in property with a contribution of hundreds of dollars instead.
Alternative investment strategies: Top tips
Let’s wrap up this article with some dos and don’ts if you’re tempted to take the plunge and start exploring what best alternative investments have to offer.
It’s worth bearing in mind that you’re unlikely to enjoy the sort of protections that you’d see in more traditional investments. Significant gains are possible, but the potential for losses is also substantial. Here’s just one example of how alternative investments can go wrong.
A chain of Mexican restaurants called Chilango, based in the UK, raised millions of pounds by offering so-called “burrito bonds” to everyday investors. Those who got involved were being promised returns of up to 8 per cent a year. Alas, as the firm’s debt burden grew, the brand was confronted with little choice but to pursue a company voluntary arrangement. Investors have been faced with the risk of only getting back 10p in every £1 they poured into the company. When it comes to alternative investments, it’s vital to look past eye-catching promises and drill down into the numbers to see whether these claims are viable.
You should also be careful not to mingle your hobbies too closely with your alternative investments. If you love classic cars or consider yourself a wine buff, it can be all too easy to let your passion cloud your judgement. Being dispassionate about an investment can be equally dangerous. Realising returns can take time and a lot of patience – and if you’re seeking short-term gains, this might not be the sector for you.
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