Alternative investments unleashed: everything you need to know about investing in alternative assets
Sam Plumptre, CEO, CoInvestor
Amid a growing interest in real assets, alternative investments are an increasingly popular choice for diversifying portfolios and offsetting stock market volatility. Yet the term ‘alternatives’ encompasses a large asset class with many different sub-categories, some of which are a challenge to research and understand. Our intention at CoInvestor is to demystify and educate by exploring the ‘need to know’ in alternative assets.
Alternative investments are becoming more mainstream as people look for ways to meet the challenges of today’s investment landscape: low-yielding bonds, highly volatile equity markets, low-growth prospects in developed markets, and looming inflation. But how do we navigate their variety and scope?
The main categories of alternative investments are:
- Private equity & venture capital
- Alternative strategies
These ‘alternatives’ share common characteristics aside from not being listed shares or bonds.
Firstly, they are difficult to value. The difference between the ‘mark to model’ and the ‘mark to market’ price of the asset can be large, as the theoretical price is different to the market value.
Secondly, they often offer low liquidity. They are harder to buy and sell and should therefore be considered a longer-term investment.
Thirdly, they typically carry higher risk (and higher potential returns) than traditional investments, and should be considered with care and due diligence.
Why are they becoming so popular?
Given today’s investment landscape, portfolio construction based on traditional asset allocation has not provided the diversification needed to navigate challenging markets. As a result, investors are seeking other means to diversify their portfolios and many are turning to alternative investments.
Alternatives have historically delivered returns with lower correlations to stock market volatility. This in turn can shield investors from many global economic risks and offer opportunities to generate greater long-term returns than those available through other types of investment.
For example, many investors have taken a particular interest in infrastructure because those investments are derived from underlying long-term contractual agreements on high quality assets, leading to a stable investment yield.
Others, sometimes driven by tax planning, have turned to investing in private businesses through Venture Capital Trusts (VCT) or Enterprise Investment Schemes (EIS). These investments have the potential to yield greater returns and offer appealing tax incentives, but also carry greater risk and therefore often benefit from professional guidance.
If you save or invest money you’ll generally have to pay tax on any income you generate, but there are ways of investing that deliver more efficient or even tax-free returns. Alternative investments such as VCTs and EIS were introduced to provide early stage businesses with capital. To incentivise such schemes, the government provides significant tax breaks to investors, making them an increasingly popular addition to the portfolio.
Exercise caution and seek expert advice
Very few private investors have the time or experience to seek out the best investment opportunities – let alone agree the right terms and conduct effective due diligence. CoInvestor’s platform helps mitigate investment risk by letting qualifying private investors co-invest alongside experienced fund managers. The CoInvestor platform has been designed to offer easy access and transparency of investment opportunities to all stakeholders, demystifying a traditionally complex investment process.
For more information on alternative assets, visit: https://www.coinvestor.co.uk/.
Investments shown on CoInvestor put your capital at risk. The investments listed are in unlisted companies which are likely to be harder to value and sell than quoted shares. Investors may not get back the full amount invested.