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Summary
- Alternative investments offer an opportunity to get lucrative returns beyond the traditional asset classes of shares, bonds, or cash.
- One prominent reason for the rising popularity of alternative investment is a rapid rise in their availability to a wider set of audience.
Overtime, alternative investments have been increasingly attracting the attention of investors. For a private investor, they present an opportunity to get lucrative returns beyond the traditional asset classes of shares, bonds, or cash. Some common examples of alternative investments are fine wine, stamps, venture capital, parking spaces, futures, art and antiques, real estate, cryptocurrencies, hedge funds, film scores, commodities, foreign currency and derivatives contracts, apart from others.
Though many of these options have been around for a while now, but one prominent reason for their gaining popularity is a rapid rise in their availability to a wider set of audience. As a thumb rule, investment experts say that though it mainly depends on your risk appetite, usually an investor may typically allocate between 5 and 30 per cent of his portfolio to the alternatives.
Also Read: Seven Things to Know Before Investing Your Money in Cryptocurrencies
Let us take a look at the top five alternative investments options available at present in the UK.
Financial Derivatives
A financial derivative is basically an agreement between an investor and a party that he would be paid out whenever an asset reaches a particular level. There are various types of derivatives available such as futures, options, forwards and swaps.
However, options and futures are relatively easily accessible to individual investors, while swaps are mostly traded by large institutional investors.
Also Read: How big is the UK stock market?
Hedge Funds
The hedge funds typically collect money from multiple investors. Then they spread the collected capital to different investments, thereby raising the chances of a return on investment. By definition, they are free to invest in all kinds of financial instruments like commodities, futures, derivatives, stocks and so on.
However, usually, most of the hedge funds have an entry barrier in the form of a minimum investment requirement.
Private Equity
Private equity implies investing in a company which does not issue public stocks. It can be done by contributing capital to the company. Later, when that company either issues shares through an IPO (Initial Public Offering) or goes in for, say a merger, you will get a return on your initial investment.
For start-up firms, investors also get an opportunity to shape the management strategy of the growing company if they are interested.
Also Read: Five Golden Rules Investors Should Know Before Investing
Gold
Commonly regarded as a tangible hedge against inflation, gold has traditionally been a sought-after alternative investment class. It has given strong competition to stocks during the ongoing tough pandemic times.
Gold can either be bought in the physical form (bars or coins) or via gold ETFs (exchange traded funds). One may also invest in gold futures and options.
Also Read: How Inflation Affects Your Investments And Finances
Real Estate
You can buy a residential or commercial property and rent it out if interested in this option. Over time, not only will you get a rental income, but you will also gain from the appreciation of your property prices.
The most popular way to buy a property is to make a down payment with a bank financing the rest.
While renting out the property, you can also pass on the responsibilities of a landlord, like getting the repairs fixed to a property management firm.
