Investors are always looking for new ways to build their investment portfolios in this struggling market. An alternative fund is an excellent way to diversify investments, create more market exposure and help mitigate risk.
What are alternative investments?
Alternative investments are financial assets that do not fall into one of the traditional investment categories or asset classes, such as Equities, Bonds or Cash. This could include private equity, venture capital, real estate, hedge funds, art and antiquities, commodities, or even digital assets such as NFTs and cryptocurrencies. They tend to carry higher risks but promise high returns as well.
A downside of alternatives is that they are illiquid, meaning they are challenging to convert into cash. For example, a 200-year-old painting acquired as an asset is more difficult to sell or convert into cash than 200 shares of Google. It is also easy to determine the value of 200 shares of Google but more difficult to determine the value of the painting, of which there will only be a few private buyers.
The upside is that alternative investments tend not to correlate with traditional assets like equities and bonds and keep value when markets take a downturn. This is a good strategy for an investor to protect capital.
A financial advisor can find the right potential alternative funds or assets to complement your portfolio and help investment risk management.
Types of alternative investments
- Cryptocurrency – probably the most well-known alternative, cryptocurrency is a digital currency that runs on a blockchain, e.g. Bitcoin and Ethereum. It can be used for investment purposes or to transact. It has been around for about fifteen years and is more popular with younger investors open to alternative currencies.
- NFTs – Non-fungible tokens are digital cryptographic assets based on blockchain technology like crypto. They are usually digital art that cannot be replicated. This is a relatively new alternative asset and has yet to have proven investment value, although certain images from the ‘Bored Ape Yacht Club’ have reached sales of $3.4 million for Bored ape #8817.
- Structured products - A structured product is a financial investment where the market returns and risk are defined at the outset, thereby providing known outcomes and all within a fixed maximum term, i.e., the product has a start date and an end date.
They are linked to the performance of an underlying asset; these are usually equity stocks or indices like the FTSE 100 or a combination of indices like the FTSE 100 and EURO STOXX 50, for example. The investment offers exposure to the financial markets with a level of protection you wouldn’t have if you invested directly.
- Art and Antiquities – This is self-explanatory. Investing in art and antiques is a particular niche market with the potential for excellent long-term investments. It is, however, one of the most challenging assets to liquidate as buyers are a small group, and value is subjective, e.g. buying a Picasso or an antique Victorian desk.
- Real Estate – Investing in real estate or property funds has always been a good return on investment. This asset generally performs favourably in the market and is an excellent long-term investment.
- Hedge funds – A hedge fund is a pooled investment fund that uses several strategies to trade and leverage non-traditional assets like commodities, derivative products, trade bonds, convertible securities, etc., to best earn above-average returns for private clients.
- Venture capital - This is a form of finance equity that finances start-ups and small businesses that have long-term growth potential. There are several venture capital funds on the market that investors can take advantage of.
- Commodities – These are essential resources used in commerce to produce other goods, e.g. gold, grain, oil, beef, natural gas, corn etc. These assets are short-term investments and are often traded on the stock market. There are also, for example, funds that invest in minerals like gold and platinum.
Why invest in alternatives?
Alternatives or alternative funds are less affected by broader market turbulence as they focus on a specific investment. Allocating a percentage of your portfolio to alternatives can offer an added layer of diversification and help reduce overall risk while offering higher investment returns. It is becoming an increasingly popular trend with investors that want high returns but still protect capital.
deVere offers a Diversified Liquid Alternatives fund as part of its deVere Asset management fund portfolio. This fund is designed to complement traditional equity and bond investment.
Your financial advisor can advise which alternative investment or fund is best suited to diversify your portfolio according to your financial needs.
