There are several different types of alternative investment. All posess their own benefits, making them a hit with experienced investors in particular.
Alternative investments offer a variety of underlying assets, and they often allow investors to take advantage of tax-efficient methods of investing - such as through an ISA or Venture Capital Trust (VCT).
The main alternative investments are;
- peer-to-peer loans
- venture capital
- private equity
- collectables such as antiques, art and wine
- hedge funds
The different types of alternative investment, explained
The process of peer-to-peer lending allows individuals or businesses (borrowers) to obtain loans directly from other individuals (lenders), cutting out financial institutions such as banks that would usually act as the middlemen. By removing these middlemen - which in turn removes hefty overhead costs - peer-to-peer loans may be able to offer both the borrowers and the lenders better rates.
The popularity of peer-to-peer loans has increased over the past few years, and the introduction of the Innovative Finance ISA (IFISA) in April 2016 meant that peer-to-peer loans could - for the first time - be held under the tax-efficient ISA wrapper, which makes any returns completely tax-free. Now, the IFISA market is worth over £1 billion.
Venture capital is a kind of funding that investors provide small businesses and start-up companies that are believed to have long-term growth potential.
Small businesses often rely on investment to help them grow, and though their early-stage categorisation makes them a riskier investment, they have the potential to earn significant returns for investors if they succeed.
Through a Venture Capital Trust (VCT) - which is a tax-efficient, closed-end fund - investors are offered tax advantages and the ability to invest in a diversified portfolio of venture capital investments.
As well as this, some venture capital investments offer Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) tax benefits, further encouraging investment into small businesses.
Private equity refers to capital or equity that is not publicly traded, and private equity firms generally use funds raised from investors to acquire and grow private businesses - usually for between three and five years.
Firms will then sell the businesses for a profit, generating - typically above-market - returns for investors.
Property is a hugely popular investment. Many investors are reassured by its physical nature, and the fact that property investments usually don’t correlate with the performance of the stock market can be a useful tool in regards to diversification.
There are many variations of property investment, from traditional buy-to-let and property bonds, to Real Estate Investment Trusts (REITs).
Property bonds are issued by development companies and house-builders in order to raise funds for both commercial and residential property projects.
They can often be asset-backed, meaning your investment is secured against the land or property by way of a first or second legal charge, offering collateral and security for investors. However, property bonds are not covered by the Financial Services Compensation Scheme (FSCS), and returns are not guaranteed.
A REIT is a company who owns (and typically operates) real estate on behalf of shareholders. They give investors a way of investing in buy-to-let, without having to purchase any properties outright, or be in charge of their general management.
Though collectable items such as antiques, art and wine may be seen to most as a hobby, it’s often possible to generate attractive returns from selling them on. It’s important to understand that collectables are a much more complex - and risky - investment option than others though.
It’s possible that - especially when held onto long-term - the value of some collectables will increase. However, this is not guaranteed, and unlike many other investments, there is a lack of income until sale.
A hedge fund is an investment fund managed by an investment manager that pools capital from investors and invests into a variety of assets, employing often complicated strategies to earn an active return for investors.
Hedge funds are generally limited to high-net-worth investors - who are able to afford the higher fees and risks that accompany hedge fund investing - and institutional investors.
Annuities are long-term investment products - often considered to be insurance products - that are generally sold by insurance companies. Their purpose is to allow individuals to swap their pension pots for a regular, fixed income.
An annuity provider will accept and invest your pension fund, and will then pay you a set amount of money every month either until you die, or for a specified amount of time.
Different annuity providers will offer different rates, so it’s advisable to shop around before making any commitments - because once you have purchased an annuity, you can’t change your mind.
There are several different types of annuity, including joint-life annuities which continue to pay an income to your spouse or partner after you die.
Put simply, cryptocurrency is digital currency. It’s secured by cryptography, and operates independently of any central authority.
An essential component of many cryptocurrencies are blockchains. Blockchains are, essentially, a system of recording information that makes it almost impossible to change or hack.
The first - and still the most popular - blockchain-based cryptocurrency was Bitcoin, which was launched in 2009, and as of November 2019 has a market value of over $140 billion.
CARLTON Bonds are an IFISA provider specialising in fixed term property bonds.
Against a backdrop of low interest rates and a volatile stock market, the IFISA can provide an attractive investment opportunity for experienced investors.
With the ability to hold peer-to-peer loans and debt-based securities, IFISA investments have the potential to generate higher rates of return than more traditional investment routes for investors with a greater appetite for risk.
To find out more, download our free IFISA guide.