What is an alternative investment?

Diversifying your investments is a key attribute of a successful investment portfolio. It helps balance risk and reward and protects the longevity of your portfolio during periods of stock market and economic volatility. Alternative investments are a useful tool in this regard, helping you reduce the overall risk of your portfolio and potentially introducing new opportunities for your income to grow.

There are many alternative investments available, covering a broad range of areas. The following are some of the key types you may wish to consider for a diversified investment portfolio .

Gold

Gold is the ultimate store of value, acting in this role almost since the dawn of civilisation. Valued for its scarcity – the whole amount of gold ever mined in the world would fit into a crate 22m cubed¹ – it has therefore been used by central banks to diversify their reserves for many years, as well as being used in the jewellery industry.

Gold can hardly be described as a classic low risk investment – the price can swing quite wildly at times – but importantly, this volatility is normally unrelated to any similar volatility in equities. At moments of high crisis, equities can plunge while gold soars. This gives it a key place in any investor’s portfolio.

Property

Property is another asset within the alternative space, although this typically refers to commercial rather than residential property. The commercial property sector is diverse and includes traditional areas such as offices, retail, and industrial estates, but also newer areas such as distribution warehouses, telecom towers and data centres. As an asset, property typically holds its value in real terms (i.e. after correcting for the effect of inflation) and the majority of the return comes in the form of income, which tends to be more stable. The value of property can of course fall, but it tends to be less volatile than equities.

Infrastructure

Infrastructure is another sub-sector of the alternative investment space which covers a very broad area but offers many of the same characteristics as property. Infrastructure includes companies invested in areas such as the HS1 rail link, gas storage terminals, renewable energy, and toll roads. These tend not to be economically sensitive, and the companies can offer secure long-term cash flows and dividends. However, as with property, in a high inflation, high interest rate environment, this area can suffer in the short term, although it can offer good, longer-term inflation-based returns.

Absolute return funds

Absolute return funds aim to deliver a positive return, irrespective of the prevailing conditions in markets. They do this by trading in and out of a wide range of assets, ranging from currencies and commodities to equities and bonds. Their performance record hasn’t always delivered on the premise of absolute return and when interest rates have been low, modest returns have been quickly absorbed by costs. However, these vehicles continue to offer an alternative to more volatile asset classes.

Cryptocurrencies

Finally, we come to cryptocurrencies, the most famous of which is Bitcoin. They don’t currently form part of the mainstream investment scene in the UK and the Financial Conduct Authority (FCA) has kept this market largely unregulated. Disregarding, for a moment, the merits of Bitcoin, there is an increasing movement across the world to allow investors to gain exposure to this area in a more regulated way. The main problem for investors has been the lack of a regulated exchange, which means that there has been a high risk of fraud, market abuse and theft. By having global institutions acting as custodians, a large part of the risk is taken out of investing in cryptocurrencies, and they are likely to move into the mainstream in the years to come.

Other investment options

There are also some other classes of investment that don’t form part of the traditional investment portfolio. Tangible assets such as art, antiques, stamps, classic cars, and fine wine are all examples of assets that aren’t especially correlated with either each other or global stock markets.

Next steps

Understanding where to invest can be difficult to manage on your own, that’s where getting some financial advice could help. By working together, we can help you build an investment plan that helps you achieve your financial goals and ideas.

1. How Much Gold Has Been Mined? | World Gold Council ↩︎

The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.