What is an Alternative Investment?

Alternative Investment

What is an Alternative Investment?

Alternative investments are anything you might put money into that isn’t cash, publicly-traded stocks, or bonds (the pillars of “traditional finance”). This can cover areas as diverse as property, art, debt, Cryptocurrency, and a wide variety of really clever financial schemes.

There are a few people in the world who might try to tell you that the “alternative” in “alternative investment” means “an alternative to profit”. They’re wrong, but let’s look at the comparison with traditional finance to see why they might say that.

Are there any alternative investments that can make you money? Or are you locked out, looking in? Let’s find out.

Traditional vs Alternative Investments

The three financial instruments that make the financial world go round are cash, publicly-traded stocks, and bonds. Because these are so important to the world’s financial system, there’s a whole host of regulations behind them, from laws governing counterfeiting to laws governing how companies can market investments, to money-laundering laws, to laws managing allowable risks, to laws removing entire populations from the financial system altogether.

The whole system is designed to remove as much risk as possible. And since risk is the bedrock of higher investment returns, you can see why people with money to burn might fancy taking a chance on other things. There’s no shortage of those.

Key Characteristics of Alternative Investments

Technically, the biggest factor common to alternative investments of all kinds is that investors accept a higher risk, in the expectation of a higher return. There’s usually no regulation safety net to stop you from losing all your money (and with some investments, even more than you invested!).

Another characteristic is that asset investments can be less liquid. This is when an asset is more difficult to sell or has a limited number of buyers: more people will buy 1000 Apple shares than they would buy a vintage bottle of wine. In some areas such as art, only experts are able to even value the assets. It’s common with alternative investments that there is a high minimum investment and high fees, too.

An attractive feature of many alternative investments is that they move over time in different ways to the main financial markets. Something like Gold, for instance, might go up as the stock market goes down.

This combination of risk and illiquidity means that traditionally, alternative investments have been targeted at high net worth individuals, and have been considered long-term investments. That said, there are more alternative investment funds than there used to be that are open to risk-loving retail investors.

Hedge Funds

Hedge funds have become a byword for financial shenanigans and overly rich fund managers, but they’re actually an attempt to beat the markets by buying and selling “options” (promises to buy or sell assets later) to make money whichever way the market moves.

Hedge funds are, traditionally, very profitable. But are you comfortable investing considerable amounts of money in something so clever that even trying to work it out makes your brain shut down?

Your answer to that question may vary, but there are more easily digestible ways to earn a higher return on your assets.

Real Estate

There are various options available for investing in real estate that doesn’t involve actually buying a building, but as usual, you’re dependent on the judgement and honesty of others. And, you’re at the mercy of the property market. Another challenge is selecting a property investment fund that’s going to succeed for you: a difficult job since “past performance isn’t indicative of future success”, and your crystal ball is probably broken by now.

Precious Commodities

You could buy Gold and Silver, though that’s difficult to resell, and useless in the event of nuclear apocalypses (I’m sure Crypto would continue just fine in that event).

Peer to Peer (P2P) Lending

Peer to peer lending can be an indirect way to invest in the property market, except you’re investing in buyers rather than properties. In times of high demand, there are more buyers needing money and are prepared to pay higher prices to get it. Peer to Peer (P2P) lenders such as easyMoney (from the people who decided that 1kg of extra hold baggage really deserves punishing) match lenders with borrowers.

It’s a decent return and one of the safer alternative finance options, but it’s not “set it and forget it”: a borrower might get their loan from a group of people, and a lender might lend to a group of lenders: that’s a lot of due diligence work you have to do.

Cryptocurrency

Cryptocurrency is of course a virtual asset: you’ll never carry one in your wallet, but it can act as a store of value.

With an amazing number of apps and wallets, Crypto qualifies as the alternative investment with the smallest barrier to entry, with possibly the biggest profit potential – and potentially the biggest risk!

But apart from buying and holding (and hoping your Crypto goes up in value against traditional currencies), how can you invest in Cryptocurrency?

The most familiar concepts that appear in Cryptocurrency are versions of P2P lending and interest-bearing savings.

Cryptocurrency P2P

Peer to peer lending in Cryptocurrency isn’t based on property though: it’s based on people depositing “Stablecoins” (unofficial digital representations of real-world assets, such as the US Dollar) and borrowing Cryptocurrency to invest somewhere else to make a profit. It’s much riskier than the real-estate version.

Cryptocurrency Savings Accounts

Surprisingly for such a new technology, an old-fashioned concept such as “savings” is well-represented. You can even save digital versions of traditional currencies for great rates of return compared to traditional savings accounts.