Alternative investments used to be the preserve of select groups. Institutional investors, family offices and wealthy individuals were pretty much the only groups to go down that route.
Now the market has opened up, with private equity, venture capital, hedge funds and more getting involved. Market forces are also playing a role. With more and more reason to consider alternatives as a part of a portfolio, they are now mainstream.
“There are probably two things driving [this]: access and awareness,” says David Russell, chief strategy officer of Goldcore. “A lot of alternative assets were historically quite difficult for ordinary investors to access. You either needed significant capital, specialist knowledge or the right connections. That has changed.”
The breadth of investment platforms available has widened access, giving more investors familiarity with alternatives. “Accessibility has also improved in recent years,” says Ronan Barry, associate director of global investment selection at Davy.
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He says investor friendly structures such as UCITS (undertakings for collective investment in transferable securities), AIFs (alternative investment funds), and, in private markets, ELTIFs (European long-term investment funds), have opened up the market for alternatives. A similar impact is being felt in venture investing.
“What was once reserved for ultra-high-net-worth individuals has become accessible to a much broader group of investors, recognising the benefits of higher returns and diversification,” says Niall McEvoy, managing director, venture, at Elkstone.
While access is easier now, alternatives shouldn’t be treated as just an add-on. New investors need to work out what role they want alternatives to play in their portfolio.
“I think the starting point is to ask what you actually want an alternative asset to do for you. Adding alternatives to a portfolio just for the sake of it doesn’t necessarily make it better or more diversified,” says
The role that alternatives play could vary from growth to mitigation within a portfolio.
“Given the broad range of strategies within alternative assets, they have the potential to play multiple different roles within a well-diversified portfolio,” says Barry.
That variety is the core appeal when it comes to alternatives because of what they can bring to investors.
“Alternative assets offer diversification from traditional investments such as listed equities and bonds, but they can also enable investors to harness the potential for higher returns from innovative, high-growth companies, funds, developments and projects,” says McEvoy.
When it comes to alternatives, it’s key to look at the characteristics of the different types of potential investment rather than merely assuming they will all work the same way.
“Property, private equity, commodities, precious metals and collectibles can all sit under that heading, but there isn’t much point treating them as though they are the same thing,” says Russell.
You’ve got to think about what you want the alternative to do, factor in the risk and costs, as well as how quickly you’ll need to access the investment.
“Firstly, review your investment portfolio and identify areas where alternative assets investing could enhance your diversification or return,” says McEvoy.
As with any investment, it’s crucial that you understand the product’s purpose and what it does. “Critically, an investor must be comfortable that they understand the investment, its potential returns and its risks,” says Barry.
While alternatives offer different sources of return, they naturally come with their own complexities.
“Alternative assets are typically more complex than traditional asset classes, and due diligence is essential,” says McEvoy.
This merits particular attention when it comes to the type of capital being committed to the market and the desire to access it.
“Certain alternative asset classes like property or private markets are significantly less liquid than others so investors need to understand their own liquidity requirements,” says Barry.
Still, as with any product, risk varies enormously so it’s crucial to look beyond the label when considering alternative investments.
“Understand what you’re buying, how it behaves, how easily you can sell it and, most importantly, why you own it in the first place,” says Russell.
Alternatives can broaden a portfolio and potentially improve the risk/return nature of it but that doesn’t automatically make them better. To get value, they need a defined purpose and to be used intelligently.
