What are alternative investments?
Alternative investments are a broad category of investments that fall outside of the traditional asset classes of stocks, bonds, and cash. They can include a wide range of assets that generally fall into 7 buckets, namely:

 

The Alternative Advantage

There are a number of reasons why alternatives may carry an edge over more traditional investing. The top 3 advantages are: 

Alternatives have outperformed the FTSE 100 by at least 2% on average per year for the last 10 years! That’s a 21% difference compounded over 5 years. 

1. Alternative investments have the potential to generate higher returns than traditional investments.

This is because they often invest in assets that are more difficult to buy and sell. The compensation investors get for taking on this difficulty is called the liquidity premium.

Investors, especially big money institutions, are generally willing to pay more for the ability to easily buy and sell assets. This drives up the prices of those assets, such as listed equities, because there is increased competition amongst buyers.

By avoiding where the competition is, investors can secure much better prices, increasing both the chance and size of profits.

2. Alternative investments can help to diversify a portfolio and reduce risk.

Some classes of alternative assets are less influenced by wider economic factors, such as fine art and real estate. Private companies may also provide a way to get better exposure to a specific region or trend, such as nursing homes or recycling for a target region.

These idiosyncratic drivers make most alternative investments less correlated with traditional assets. This means that they can reduce overall portfolio volatility and increase the resilience of returns by insulating performance from the negative effects of a single event.

Diversification came to the fore in 2022 when interest rates rose substantially in response to higher inflation. Stocks and bonds globally generally declined between 7% and 25% – before inflation. Comparatively, fine art and whisky both produced gains above 20% on average.

3. Alternative assets may be tax efficient. 

Alternative assets may also come with a myriad of tax advantages that are specific to the investor or investment itself. The United Kingdom has tax-efficient investment programs that offer investors tax incentives for making some kinds of investments – EIS and SEIS registered offerings – and outright exemptions for others – such as whisky casks. Real estate is well known for its depreciation and other accounting advantages for investors. 

Integrating these assets into a portfolio improves your ability to actually take home the profits you generate.

Bonus Reason! 4. Aligning your values with you the issues you value.

With alternative investing, particularly regarding private equity and credit investments, the scale and targeted nature of your investment mean that you have the ability to make a tangible difference in problems you care about.

Often, investing in public market companies only enriches the shareholders of these companies, rather than actually going to fund the companies themselves. You buying Tesla stock on the open market doesn’t make a real difference to the market or the mission of the company.

However, investing directly in the building of social housing will concretely generate positive ripple effects that go well beyond your bank account. 

Alternative assets provide the most direct way to invest in solving the issues you care about while excellent generating returns. 

Alternative assets are not a panacea for the investing problem nor or they suitable for everyone. Whether or not alternative investments are right for you depends on your individual circumstances and investment goals.

However, our firm conviction is that the higher returns that investors often see for investing in alternatives are the reward for patience in investing, not compensation for higher risk. The diversification and potential tax benefits complete a compelling case for inclusion in any investment portfolio.

Finally, too often society seems to trivialise the impact of peace of mind in investing, focusing on capital accumulation. Getting a financial return is crucial – and is an unavoidable first hurdle for any investment decision – but to think that you have to choose between the two is a false dichotomy. You can have your cake and feel good about eating it too – in fact, you deserve to.

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