For those with enough money to diversify their portfolios, alternative investments such as crypto, contracts for difference (CFDs) or private equity could offer a different proposition.
What exactly are these options? What are the risks – and how can you invest?
Crypto
Dogecoin, bitcoin, ethereum, drift and hopr are just some of the many thousands of cryptocurrencies – many of which are actually non-functional or scams – that are now available for investment. Even US president Donald Trump has his own coin available.
Launched just 17 years ago, the first cryptocurrency, bitcoin, has since spawned a universe of digital money tokens.
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David Looney, a director of Alpha Wealth, says that in his experience of offering financial advice, he has come across quite a lot of people with some crypto holdings, noting it is particularly prevalent among younger people. They may have given up on the dream of buying a home and are instead putting money into crypto in the hope that it might come good by delivering exponential gains.
“But I’d be giving big flashing red warning signs,” he says. “It’s a very volatile asset class.”
It is, indeed. On March 18th last, for example, bitcoin had stood at $74,474, before plummeting by more than 10 per cent to $66,214 on March 28th. Some two weeks later, it had risen again to $75,220.
Expectation of big gains – or the opposite – can taint people’s experience of investing, notes Looney. If they see their money wiped out, it can make them think they tried investing, and it didn’t work. Just think back to Ireland’s great experiment with shareholder democracy in Eircom and how that worked out for a generation of Irish adults.
“It’s more akin to gambling than investing,” he says of cryptocurrency.
“If someone is really adamant that they want to get into it, I’d say stick to reputable exchanges, well-known coins, only put in money you can afford to lose, and do it as part of a well-diversified portfolio,” says Looney. “Go into it with your eyes wide open.”
The Central Bank, which doesn’t regulate the sector, warns that “cryptoassets are highly risky and speculative, and may not be suitable for retail customers”. It means “you need to consider if you can afford to lose all of the money you invest”, and there is no protection if things go wrong. Remember, your investments are not covered by the Investor Compensation Scheme.
Be careful also of influencers promoting crypto schemes on social media – something that was highlighted on Louis Theroux’s recent documentary, Manosphere.
With so many options out there, “you have to ask the question of how many of these coins will still be around in 10 years?” says Looney.
You can buy crypto through myriad sources, but some of the main ones familiar to Irish investors will be Revolut or Coinbase.
You can buy and sell more than 250 tokens through the main Revolut app, for example, or through its cryptocurrency exchange, Revolut X. Revolut holds a Markets in Crypto Assets (MiCA) licence from the Cyprus Securities and Exchange Commission, which allows it to market its crypto assets in Ireland.
In Looney’s experience, people are more likely to put money directly into coins, but it is also possible to opt for an exchange-traded fund (ETF), such as iShares Bitcoin Trust ETF, which aims to reflect the performance of the price of bitcoin.
When it comes to tax, Revenue’s guidance indicates that gains on cryptoassets are liable to capital gains tax (CGT), at a rate of 33 per cent. The first €1,270 of taxable gains in any year are exempt from CGT.
If you invest via Revolut, it will provide you with a profit-and-loss report to help you file your Revenue tax return. You can also avail of a service such as Koinly (20 per cent discount for Revolut users), to help with your tax reports.
Private equity
If you’re more interested in investing in a company, you might be missing out on the opportunity for growth among the world’s top private companies if you only invest in publicly listed companies. Accessing such companies through private equity has become more accessible, but you will still need deep pockets to do so.
Conor O’Dea, a managing director in investment management with Key Capital, an independent local firm with a global investment mandate, says private equity typically refers to taking majority ownership in mature cash-flow-positive businesses that are private, such as Syntegon and Grant Thornton.
Sometimes confused with venture capital investing, which is more about early stage start-ups, private equity focuses on well-established companies that are cash-flow positive.
It can be difficult – and would require significant capital – to gain access to invest in a single private company, while your risk would also be concentrated.
“It’s only really appropriate for investors with significant amounts of capital, or significant knowledge of a sector,” says O’Dea. So, for most then, investing in a fund, which spreads exposure across a portfolio of companies, or a fund of funds (FoF), which also spreads risk across managers, is the way to go when it comes to private equity.
Key Capital manages private-equity FoF structures, which invest across a number of private equity funds, providing diversification across managers, strategies and sectors. It has a minimum investment of €250,000, so as an asset class, the bar to access is high.
Investors also need to be comfortable with the illiquidity of private equity.
“This isn’t money you can access at short notice,” says O’Dea, noting that investors will typically put their money away for a period of 10 to 12 years, with a view to getting a return of two times their capital back over this term, a so-called “illiquidity premium”.
“The key to it is that you have to be comfortable with this illiquid piece; it’s not for capital you’d need at short notice,” says O’Dea.
So you’re investing over a longer horizon, with the expectation being that you’ll be rewarded for that patience in terms of return. But you might get money back during the term.
As companies are sold down, managers make distributions to investors, typically from about year five, says O’Dea.
Fees can be higher than your typical equity fund, at about 1.5-2.5 per cent a year, while a performance fee can also apply.
CFDs/Spread betting
Known to many readers as the financial vehicle that Seán Quinn used to build up a shareholding in Anglo Irish Bank that ultimately bankrupted him, contracts for difference (CFDs) are a high-risk tool used to invest in companies.
Unlike buying a direct share, a CFD is a derivative. That means it allows an investor to track the price of an asset – which could be a share, index, or commodities – without actually owning the underlying asset.
It allows a person to bet in either direction on the price. So you can buy in the expectation that the price will increase, or agree to sell if you think it will fall.
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CFDs are also leveraged, which means you can take a position for a small amount, known as margin. For instance, you could get a €20,000 position for an investment of just €4,000. But do bear in mind that your profit or loss will depend on the full €20,000.
And if the market moves against you – as Quinn discovered when Anglo Irish Bank plummeted in value – your losses can outweigh your investment.
You can invest in CFDs via brokers such as IG, Revolut and Interactive Brokers. You’ll pay CGT on your gains, which means you can also offset any losses against future gains.
Similar to this, in that you also don’t own the underlying asset, is spread-betting. A key advantage is that gains here are exempt from tax. And, as with CFDs, it allows you to bet on the price of an asset going up or down.
Again, spread-betting is a high-risk proposition, best suited to experienced traders. Many brokers offer free demo accounts so you can practise these trading techniques without putting up any money.
