4 Examples of Alternative Investments Every Investor Should Know About

Alternative investments have become a growing trend in recent years, offering investors unique opportunities to diversify their portfolios beyond traditional stocks and bonds. But what exactly are alternative investments, and why are they gaining such traction?

In simple terms, alternative investments are those that don’t fit into the typical asset categories of stocks, bonds, or cash. From cryptocurrencies to venture capital, alternative investments are more diverse than many realize. Let’s explore some examples of these non-traditional investment options and understand how they can benefit your portfolio.

1. Venture Capital

Venture capital is one of the most well-known types of alternative investments, especially among experienced investors. It involves providing funding to early-stage companies in exchange for equity ownership. The goal is to help these companies grow, often with the hope of a lucrative return on investment as the company becomes more successful.

In 2020, the UK tech sector broke records, with £11.2 billion invested in tech companies. The demand for venture capital continues to rise, especially in sectors like technology, healthcare, and green energy.

Venture capital can be accessed through several avenues, including tax-efficient investment schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes offer generous tax reliefs—such as up to 50% income tax relief and zero capital gains tax on returns—making them an attractive option for investors looking to support innovation while enjoying tax benefits.

2. Private Equity

Private equity investments are similar to venture capital but typically involve investing in more mature companies. Private equity firms often acquire majority stakes (over 50%) in businesses with the intention of improving their efficiency and value before eventually selling them for a profit.

While venture capital targets startups, private equity investments are more likely to focus on established companies that need restructuring or operational improvements. A well-known example of private equity in action is the acquisition of the genealogy platform Ancestry by Blackstone, which was valued at $4.7 billion.

Private equity tends to offer higher returns than traditional investments but also comes with higher risk due to the complex nature of these deals. The capital invested in private equity is often tied up for several years, making it less liquid than other investment options.

3. Peer-to-Peer Lending

Peer-to-peer (P2P) lending is a relatively new but popular form of alternative investment that has gained momentum over the last 17 years. P2P lending platforms connect individual borrowers with lenders, allowing for loans without the involvement of traditional banks. The borrower repays the loan with interest, and the lender earns returns based on the interest payments.

P2P lending can cover a wide range of sectors, including consumer loans, business loans, and property investments. Platforms like CARLTON Bonds offer attractive returns on property bonds, with interest rates reaching up to 7.75%.

The advantage of P2P lending is the potential for high returns, especially when traditional interest rates are low. P2P loans also tend to have lower fees than bank loans, which can benefit both borrowers and investors. Additionally, the Innovative Finance ISA (IFISA) allows investors to hold P2P investments within a tax-efficient wrapper, making the returns even more attractive.

4. Cryptocurrency

Cryptocurrency has become one of the most talked-about alternative investments in recent years. Bitcoin, Ethereum, and other cryptocurrencies have gained popularity as decentralized, digital currencies. These currencies operate on blockchain technology, which ensures secure transactions without the need for a central authority like a bank.

Cryptocurrencies offer investors the potential for huge returns, as evidenced by Bitcoin’s meteoric rise from $1 in 2011 to over $60,000 in 2021. However, the volatility of cryptocurrencies makes them a high-risk investment. Prices can fluctuate dramatically, as seen during the 2021 crash triggered by Elon Musk’s tweets about Bitcoin.

Despite the risks, many investors are attracted to cryptocurrencies due to their potential for high returns and the fact that they operate outside of traditional financial systems. Cryptocurrencies can be particularly appealing for those willing to take on higher levels of risk in exchange for potentially significant rewards.

Which Alternative Investment Is Right for You?

When deciding which alternative investment is right for your portfolio, it’s essential to consider your investment goals, risk tolerance, and time horizon.

• Venture capital may be ideal if you’re looking for high-growth opportunities in innovative, early-stage companies. However, it comes with a higher risk, as startups often fail or take years to show returns.
• Private equity is better suited for those looking to invest in more established businesses with a proven track record, though the investments are less liquid.
• Peer-to-peer lending could be a good choice for investors looking for steady returns and a relatively low-risk investment, especially when using tax-efficient vehicles like the IFISA.
• Cryptocurrency appeals to those who are comfortable with higher risk and volatility and are looking for significant returns over shorter time frames.

Each of these alternative investments can play a key role in diversifying your portfolio and reducing your exposure to traditional market fluctuations. By spreading your investments across different types of assets, you can create a balanced approach that helps you manage risk and maximize potential returns.

Conclusion

Alternative investments have become an essential part of many investors’ strategies, offering opportunities outside the typical stock and bond markets. Whether you’re interested in supporting the next big tech startup, diversifying with peer-to-peer loans, or venturing into the world of cryptocurrency, these alternatives can help you achieve higher returns and reduce risk.

Choosing the right alternative investment depends on your financial goals, risk appetite, and the level of involvement you’re prepared to commit. By understanding the various options available, you can make informed decisions and take advantage of the growing potential within these alternative markets.