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Most retail investors will deal with bonds, stocks and cash in their portfolios. Yet a world of opportunities – alternative investments – exists outside of these conventional categories. In this article, our investment team here at Bure Valley Group outlines the landscape for alternative investments in 2021 and explains why they can be a valuable addition to portfolios at the present time. We hope you find this content useful.
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Defining alternative investments
Alternative investors are usually quite complex and involve more risk than conventional ones, such as stocks. They also are not regulated by the FCA, tend to be fairly illiquid and often need a minimum investment to participate – thus limiting their availability to high net worth investors (HNIs) and institutional investors. Examples of alternative investments include:
- Venture capital
- Private equity
- Managed futures
- Hedge funds
- Art and antiques
- Derivatives contracts
- Real estate
EIS, SEIS and alternative investments
Here in the UK, there are a range of tax-efficient ways for people to engage with alternative investments. In particular, for those looking to invest in early-stage companies the SEIS (Seed Enterprise Investment Scheme) can be a great option. For investors looking to invest in growing businesses not listed on the London Stock Exchange (LSE), EIS-qualifying companies can also be a powerful tool in your investment arsenal.
Both schemes offer investors a range of benefits, including:
- Loss relief if the company fails.
- Capital gains tax relief & inheritance tax relief (if shares are held for a minimum period).
- Initial tax relief on the value of the investment.
The case for alternative investments in 2021
Alternative investments have long offered better returns compared to many conventional asset classes – albeit at a higher level of risk. However, the case for alternative investments has arguably increased in 2021 due to a range of factors.
One is the spectre of inflation hanging over the US, UK and other developed economies as the western world starts lifting COVID-19 restrictions. With more people now commuting into work, spending money in the highstreet and going on holidays, the UK economy is showing signs of “heating up”. The National Institute of Economic and Social Research (NIESR) has forecast that UK inflation – already above the Bank of England’s (BoE) 2% target – could reach 3.9% in early 2022. In the US, the monthly 12-month inflation rate from July 2020 to July 2021 is 5.4%.
Higher inflation means that investors need their investments to work harder to increase their real returns. Bonds are currently offering pitiful levels of return due to historic-low interest rates. US 10-year Treasury yields are under 1.3% at the time of writing (not even keeping pace with the Fed’s target rate of inflation). Alternative investments, however, can offer a wider “gap” between an investor’s hoped-for returns and high inflation.
Another benefit to alternative investments is extra diversification. Many investment platforms targeting retail investors tend to limit available asset classes to equities and bonds. They then offer “model portfolios” or “strategies” comprising various splits between the two – depending on the investor’s risk tolerance (e.g. 80% bonds; 20% equities). However, investors who also include other asset classes in their portfolios can help mitigate the risks associated with any single class. For instance, a portfolio comprising cash, bonds, stocks, property, commodities, hedge funds and private equity is arguably more diversified than one just holding the first three.
Finally, alternative investments open up the possibility for investors with special interests (and mastery) within a certain subject or field which lies outside of conventional investments. This might include investment-worthy antiques, stamps and fine wines for collectors, for instance, or startup investment opportunities for angel investors.
Risks to consider
With any investment there is the possibility that your investment may fall in value, and you may not get back what you originally committed. However, alternative investments do carry additional risks which need to be considered. First of all, most will not be covered by the FSCS (Financial Services Compensation Scheme). Therefore, if the company or project you invested in goes bust, you could lose the entire investment. Some alternative investments mitigate this risk by securing against an asset – such as property loan notes.
Secondly, illiquidity can be a greater risk with alternative investments. It may not be easy to sell that precious stamp collection or set of antiques, for instance, especially during hard economic times like those brought about by the pandemic. Thirdly, alternative investments can be difficult to determine a value for. This is particularly problematic when such assets are held overseas in a different currency. Shares and bonds, however, trade in a transparent and open market which makes their fair value much easier to determine.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827