Investments

Alternative Investments And How To Find Them

Most investors hold portfolios comprising the usual suspects; cash, bonds, stocks and shares.

Alternative investments have become more mainstream over the last decade and can provide various benefits, such as hedges against inflation and diversification.

What Is An Alternative Investment?

Anything outside conventional investments and asset classes can be considered an alternative.

The concept is often to buy into a market or asset you enjoy – such as classic cars or fine wines – and leverage knowledge to make informed decisions about how and where to invest.

Investors incorporate alternative investments into their portfolios to try and achieve returns from real-world economies rather than tracking financial markets.

Examples of alternative investments include:

  • Private equity – investing in companies not listed on a public exchange.
  • Collectables, such as fine wines, jewellery, high-fashion items or antiques.
  • Natural resources or commodities – think forests and precious metals.
  • Venture capital, picking startups or early-stage businesses with growth potential.

The list below runs through nine potential alternative investments to demonstrate the range of options and the pros and cons of each.

Fine Art

Investing in art is not a new concept but requires selecting pieces that will appreciate. Some art investors specialise in specific artists, periods, or mediums. Others will concentrate on modern art and try to spot emerging artists whose works will eventually be worth considerably more.

Any art investment should be seen as long-term. Although the broader market is generally stable and reflects significant investment returns, assets can drop in value during difficult economic climates.

Another consideration is that an artist’s reputation – past or present – is inextricably linked to the value of their art.

Many investors buy and sell through specialist fine art auctions, paying between five and 25 per cent in commission because professional collectors are more likely to attend an auction than to engage in a private sale.

Fine Wines

Exclusive, limited-edition wines were among the most successful alternative investments of 2021, returning average profits of 16 per cent. In addition, concerns around inflation have partially influenced a new wave of investment interest in the fine wines market.

Wine can act as a defensive investment but is also exposed to several challenges such as potential supply shortages, poor weather conditions or supply chain delays.

The Liv-ex Fine Wine 1000 measures the global market and shows a 10 per cent gain in 2022 thus far.

Fine wine brokers WineCap say that the market has experienced annual compound growth of eight per cent over the last 15 years, and Burgundy is achieving 12.5 per cent per annum.

Precious Gems And Metals

Precious metals and gems include anything with a high economic value, used in industrial processes, or invested in as a value store.

Examples include:

  • Gold, platinum, silver and palladium.
  • Rubies, sapphires, emeralds and garnets.

Investing in this alternative asset doesn’t necessarily mean buying gold bullion bars or coins. Instead, you might invest in shares of a corporation that mines metals or add a precious-metal-focused mutual fund or ETF to your portfolio.

One of the advantages of precious metal investment is that gold, for example, tracks the price of the natural resource and can provide inflation-beating returns.

BullionVault states that the 50-year return on gold has reached 4,084 per cent, while Statista shows a 10.61 per cent average annual return.

Classic Cars

Like fine art, a classic car can be highly collectable. Vehicles that are one of a small production run appreciate every year and even restored vintage cars can command a high market price if they are rarely available for sale.

Classic car investments are best suited to enthusiasts who wish to diversify their assets but know which cars are viable investments.

Pick wisely, and although a classic car requires ongoing maintenance and storage space, you can achieve greater returns than other collectables, such as stamps.

Property

Real estate is an accessible investment option since most investors own their homes, but diversifying with commercial property or property funds specialising in real estate assets can be a good option.

Property investors tend to invest as a long-term approach, sometimes blending capital returns with rental income or choosing to invest in future development projects or regions that are anticipated to attract considerable economic investment.

Investors can opt for an investment vehicle such as a real estate investment trust (REIT) if they want a diversified asset but with greater liquidity than owning physical bricks and mortar.

Yachts

While yachts are a physical investment asset, like a car or property, they gain and lose value differently. Some boats depreciate and reduce in value as they become less reliable or outdated, but this often does not apply to premium branded yachts.

Investors with enthusiasm for yachts that ensure their asset is properly maintained find boats appreciate or at least remain static in market value.

The drawback is that professional upkeep is likely to cost around 10 per cent of the value per year, and using a yacht for leisure incurs the cost of hiring a crew.

Euro Agent, a yacht charter business, reports that the annual return rate for all yacht categories is roughly ten per cent. However, major repairs or refinishing works could detract from those estimated gains.

Whisky

Traditionally, blenders and distillers have accessed most of the returns achievable through maturing whisky stocks.

As an alternative investment, usually facilitated through a broker, you can invest in casks or bottles of maturing whisky or scotch, with a bottle of craft whisky selling at retail for anywhere between £700 and £750,000.

Although you could purchase casks privately, most investors buy shares in a bonded warehouse, or own whisky being distilled, before it is decanted into bottles.

As whisky matures, you can either list the bottles through an exchange or retain them as a longer-term investment. Investors who sell matured whisky back to the trade realise an average return of ten per cent per year, after costs.

Prices can be volatile, but an eight-year-old bottle of Scotch whisky returns roughly 15.4 per cent a year before storage fees.

NFTs

Non-fungible tokens, or NFTs, are unique digital assets and can comprise a file, image, video, or other minted content. Most investors trade through a marketplace such as Binance or OpenSea.

The complication of NFTs is that there are multiple categories, and value is assigned purely based on investor speculation.

However, you can invest in an NFT token to trade physical commodities or digital assets that only exist in the metaverse.

NFTs open to investors include domain names, collectables, audio and art.

Sports Clubs

Sports clubs are an unusual investment option, but investors can buy into fractional club ownership by investing in a corporate ownership organisation that owns the teams they support – or predict will become successful.

There is little by way of limitation, and you could invest in a football club, an American team or a basketball team – but there is a difficult balance between investing for pleasure and an expected return.

Professional sports often seem a lucrative market due to multi-million-pound player contracts, but the reality is that most owners don’t achieve huge profits.

Some franchises, though, have proven beneficial, with the American Football team, the Dallas Cowboys providing year-on-year investment returns. In contrast, overall NBA basketball team revenues dropped by 10 per cent between 2019 and 2020.

Top Alternative Investments FAQ

What are the biggest alternative investment markets?

Global alternative investment markets made up around £12.2 trillion of invested wealth in 2021, with the largest proportions held in:

  • Natural resources: £175 billion
  • Private equity: £5.8 trillion
  • Hedge funds: £3.6 trillion
  • Private lending: £1.2 trillion
  • Property: £1.1 trillion
  • Infrastructure: £790 million

What are the benefits of alternative investment?

Alternative investments are often helpful in adverse economic conditions and act as hedges against inflation or as a diversification measure to offset a heavy concentration of particular asset classes.

Renewable energy investment, for example, is an infrastructure investment unlikely to fluctuate significantly with inflation.

Property is another example where physical real estate assets often benefit from inflation and higher rental income opportunities.

Is private equity a form of alternative investment?

Yes, private equity investment, buying equity shares in unlisted businesses, is an alternative investment. The benefit is that public markets reflect only a proportion of the corporate world and can be limited.

Are there drawbacks to choosing alternative investments?

Every investment carries an element of risk. In addition, alternatives can pose different or complex risks compared to conventional investment products, so a thorough understanding of the market is essential.

Alternatives are more popular with institutional investors than retail investors, although collectables such as whisky, fine wines and classic cars are better suited to enthusiasts.

Why has the FCA made announcements about alternative investment regulation?

The Financial Conduct Authority (FCA) is concerned about mis-selling. The regulator fears investors do not understand the risk involved with alternative investments and suspects scammers are involved in the markets.

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