CoInvestor Newsroom

Getting to grips with the basics of alternative investing

Written by Dan Carter | 2 July, 2016

In today’s turbulent markets, alternative investments are on the rise. Low interest rates combined with the volatility of global financial markets, have boosted the demand for alternative investments in recent years as an increasing number of investors embrace new ways to diversify their portfolios.

Let’s look at some of the options available.

Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a government programme designed to encourage investment in smaller unlisted companies by offering a range of tax reliefs to investors who purchase shares in qualifying companies.

The scheme has become an increasingly popular component of many higher rate taxpayers’ portfolios due to high growth potential and substantial tax breaks including income tax relief, capital gains tax exemption and inheritance tax relief.

EIS is a tax-efficient opportunity for investors looking for an alternative source of long term, high growth potential in their investment portfolio.

Since EIS was launched in 1994, over £14 billion has been raised and more than 24,500 companies have benefited from investment via the scheme. In 2014–15, 3,130 companies raised a total of £1.7 billion of funds under EIS. Learn more about EIS 

Venture Capital Trusts (VCTs)

Venture Capital Trusts (VCTs) are listed companies, run by fund managers, which aim to make profits by investing in new and fast-growing unquoted companies looking for further investment.

VCTs are sophisticated, long-term investments suitable for high net worth individuals with significant portfolios, giving them access to venture capital investments via the capital markets. In addition, the government offers generous tax benefits to investors who invest in VCTs for at least 5 years.

There are three different types of VCT to choose from:

  • Alternative Investment Market VCTs
  • Generalist VCTs
  • Specialist VCTs

As VCTs often invest in companies at an early stage of their development, they generally offer higher risk-adjusted returns than more conventional investments.

 

Private equity

Private equity has become a popular alternative to traditional investments for high net worth individuals.

Private equity means investing in firms which acquire ownership in unquoted companies to yield favourable returns.

The investment horizon of private equity firms is typically between five and seven years. While riskier, private equity investments can offer increased transparency and the potential for a larger return on investment compared with stocks and bonds.

It should be noted that private equity funds are not easily accessible for the average investor and only the wealthiest can afford to invest in them. Most funds require an initial investment of between £250,000 and £2.5 million.

 

Property

Property is one of the most common alternative investments – offering potentially attractive returns, tax incentives and the option for a reliable source of income through rental.

One of the main advantages of investing in property is its low volatility relative to equities and bonds.

Investors can opt for five different ways to invest in property:

  • Direct purchase of property
  • Buy to Let
  • Real estate investment trusts (REITs)
  • Leverage (mortgages)

Investors do however need to be in a position to accept the illiquidity of real estate assets. Unlike equities and bonds, it can take a long time to sell a property.

 

Infrastructure

Infrastructure can be defined as the essential systems which facilitate the economic productivity in a country (i.e. transport, communication, supply of electricity and water).

Investors are increasingly considering infrastructure as a high-quality investment alternative, primarily because of the potential to increase portfolio diversification and achieve stable cash yields that are uncorrelated with other more conventional asset classes.

Infrastructure investments are long-term assets that are generally less volatile than equities and bonds, providing steady cash flow and offering a potential hedge against stock market swings as well as inflation.

At the same time, however, there are several risks associated with infrastructure investing which relate to the project’s particular sub-sector, the stage of development and the political and regulatory landscape of the country where it is being carried out.

And, often more so than real estate, divestments of infrastructure assets may take a long time.

 

Commodities

Commodities include natural resources such as coal, oil and gas; ores such as bauxite and iron ore; and agricultural products such as grain and beef. Investing in commodities is an important option for investors wishing to diversify beyond traditional investments.

There are several ways to invest in commodities:

  • Futures contracts
  • Commodity stocks
  • Exchange Traded Funds ETFs) and Exchange Traded Notes (ETNs)
  • Mutual Funds and Index Funds

Commodities markets can be extremely volatile, with prices fluctuating due to a range of factors including supply and demand, inflation and the health of the global economy.

Commodities can, however, favour investors who incorporate a small percentage of them in their broader portfolio, as they can help to offset risk associated with currencies, stocks and bonds. 

Typically, conventional investors may allocate around 5% of their portfolio to commodities – such as gold.

For more information about how you can invest in some of these alternative assets take a look at the fund managers that CoInvestor works with here

Investments shown on CoInvestor put your capital at risk. The investments listed are in unlisted companies which are likely to be harder to value and sell than quoted shares. Investors may not get back the full amount invested.