A Guide to Alternative Investments

What are alternative investments?

An explanation of alternative investments is best given next to an explanation of traditional investments. Traditional investing tends to involve holding positions in stocks, bonds and cash, usually for long periods of time. These asset classes tend to be widely understood and popular with the general public. Alternative investments include more specialist assets such as hedge funds, private equity funds, real estate, infrastructure and commodities. They only tend to be available to professional investors.

What is a hedge fund?

A hedge fund is a type of investment fund that pools money from different investors and manages that capital in the hope of making a profit. The labelling of these funds with the word ‘hedge’ can often be confusing as it does not always adequately describe the strategies employed within the sector. There are thousands of hedge funds around the world and the methods they use to achieve positive returns can vary widely. One hedge fund may actively pick individual stocks, while others may invest in real estate or trade only bonds in developing markets. Hedge funds are usually only available to more sophisticated investors and a good wealth manager will always explain the strategy underlying any hedge fund investment.

What is a private equity fund?

A private equity fund is a specific type of investment fund that uses its capital to invest in the equity (stocks and shares) of private companies. Private companies are companies that are not yet listed on a stock exchange. Investors in private equity funds can gain exposure to companies that are still in their early stages and have the potential for impressive future growth. Private equity funds can act as a coach and adviser to young companies, helping them to develop and increase their value. This guidance can ultimately allow a private equity fund to sell its stake for a profit and share those returns with its own investors. It is important to remember, however, that selling at a profit is not always guaranteed.

Are alternative investments riskier than traditional investments?

Alternative investments by definition tend to compliment traditional investments and often act as a supplementary portion of a portfolio. A standard investment portfolio will usually include bonds, equity and cash as a stable foundation. Depending on the risk appetite of the portfolio holder, alternative investments can then be offered as additional options. Both of these broad investment categories contain a diverse mix of possibilities and risk should always be assessed and explained to a client by an experienced adviser.

What are the potential downsides of alternative investments?

Alternative investments can differ from traditional investments in some obvious ways. They may be less liquid, meaning it can be tougher to trade in and out of them. They may exist in less regulated environments and therefore be less transparent. There could also be higher fees involved in gaining exposure to these types of investments. Discussing your risk appetite with your wealth manager will ensure that you are comfortable with the composition of your portfolio.

Does W1M offer the opportunity to invest in alternatives?

At W1M, we offer our clients the opportunity to add alternative investments to their portfolios. Some alternative investments can be complex and it is important to understand the mechanics of any asset class before adding it to your portfolio.