Managing your wealth can be boiled down to three key elements: protection, growth and tax reduction – with each one equally relevant to people at all asset levels.
Alternative Investments can form a useful part of your portfolio, but each type of asset has its own risk and volatility profile.
Each asset class tends to behave differently through economic cycles and alternative investments can deliver performance which is uncorrelated to traditional assets. Diversifying your investments reduces the likelihood of all your assets falling in value at the same time. Alternatives may also hold out the promise of very attractive returns indeed, although with higher potential returns comes higher risk. Your financial adviser will help you decide if alternatives really are right for you.
The term “alternatives” covers a wide range of sub-asset classes: investment strategies like hedge funds and private equity funds; hard commodities like precious metals or oil; soft commodities like corn and soya beans; property; art and other high-end collectibles like wine or vintage cars;
Hedge funds are another type of collective investment vehicle – like mutual funds – where a group of investors pool their money together for a professional to invest on their behalf. They are managed on very much more entrepreneurial lines than the more mainstream collectives, however, and will usually have only a small number of large investors.
Hedge funds tend to deploy highly-specialised investment strategies which allow their managers to maximise the investment opportunities they see in the markets. Hedge funds aim to achieve higher returns than you would expect with traditional investments, but they can be significantly riskier than traditional investments and are not an area to dabble in without specialist investment advice.
With both hedge funds and private equity funds, you will usually be asked to invest a large amount which you typically won’t be able to access for at least a year. Both are known for being illiquid investments and you should not invest money you might need quickly.
As its name suggests, private equity denotes equity in privately-held companies (ones which are not listed on a public stock exchange). These companies may be in need of capital for research and development or for making acquisitions. Alternatively, the investment could be to fund a spinout or get a company out of financial difficulty and back to profitability – hence the likely longer wait to see a return on your investment.
Although direct private equity investments are an option, you might consider a private equity fund a better route from a diversification perspective. Such vehicles are usually managed by experts in private equity investing and will feature a diversified portfolio of investments to help minimise risk.
It is useful to think of commodities as something which is “the same all over”, bar small fluctuations of quality. Hard commodities usually need to be extracted from the earth in some way, while soft commodities are grown (or farmed in the case of livestock). So on the hard commodities side we have precious metals (like gold and silver, but also ones like palladium), oil and rubber; on the soft side there are corn, coffee beans and cotton.
Commodities are traded on commodities exchanges and, being subject to random forces such as poor weather or war, a host of financial instruments have been created around them. Futures are just one example. Here a contract is made which enjoins the parties in a deal to buy/sell a certain amount of an asset at a predetermined price and time.
Bricks and mortar is one of the most popular ways for people to invest and it’s easy to see why. Property is a tangible investment which can deliver impressive returns (if you get in at the right time) and also a healthy income too if you join the UK’s growing ranks of landlords.
But while property investment has strong appeal, you must remember that it can be a highly illiquid investment. Properties may change hands very quickly when markets are hot, but when they cool you could find yourself stuck with an asset which hard to sell except at a deep discount. Whether you are looking for capital appreciation or rental income predominantly, it is vital that you avoid becoming a forced seller. This means never over-stretching yourself on property investments. Your wealth manager will help you work out what the right level of property exposure is for you; markets can be very volatile.
Art, along with classic cars, fine art and jewellery are known as investments of passion for a good reason: the “return” you get from them could be just as much about enjoyment as financial gains. Collectibles can generate handsome returns, but they also call for highly specialised expertise – not only on making the right investment itself but also on storage, valuations and insurance. There are several wealth managers with specialist teams to advise on art and collectibles, however.
Although art and collectibles can generate really impressive returns while also being a pleasure in themselves, you should always consult a professional before making a significant investment. It is easy for a non-expert to lose a lot of money.
In fact, success with all alternatives is highly dependent on the skill of the person choosing the investments and their market-timing abilities. Some of the most specialist areas of investing, like art or fine wine, require a huge amount of expertise (and arguably luck). All alternative investing calls for careful risk management. Choosing the right fit for your risk profile and existing investments imperative.
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