Alternative investments are, generally, more complex in nature than traditional investments. This is why they’re predominantly more suitable for experienced investors. However, the growth of alternative investments have seen some - including peer-to-peer loans - catch the eye of everyday (restricted) investors in recent times.
But, are alternative investments a good option?
Alternative investments have many benefits. Firstly, they don’t correlate with the stock market, meaning they can add a valuable element of diversification to an investment portfolio, helping to reduce volatility.
There are also a number of tax benefits available with alternative investments - such as EIS and SEIS - that are not accessible with traditional investments. In addition, alternative investments including peer-to-peer loans and property can be accessed through an IFISA, which makes all returns tax-free.
Though the rates of return offered by alternative investments are not guaranteed, and when investing, your capital is at risk - as is the case with all investments - the potential returns on offer are usually higher than those presented by traditional investments.
With these benefits come increased risks, as well as often higher associated fees - for example, hedge funds have high minimum investment amounts, often ranging from $100,000 to $1 million in some cases.
The risks of alternative investments differ depending on the type of investment. Let’s take peer-to-peer loans as an example - the biggest risk an investor faces with the process of peer-to-peer lending is a borrower defaulting on their loan, meaning they only receive a portion - or, in some cases, none - of their loaned funds back.
On the other hand, venture capital has high associated risks because small, early-stage businesses have a high chance of failure.
The majority of alternative investments are also illiquid - meaning they cannot be easily sold or exchanged for cash.
When assessing whether alternative investments are a good option for you, it’s advisable that you speak to an independent financial advisor who can take into account your investor classification, risk profile and personal circumstances.
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.