Inside Alternative Investments
DIY Investor considers investment opportunities that lie beyond traditional shares, bonds, property or cash and looks at some of the more unusual and potentially lucrative opportunities that could be considered as part of a diversified investment portfolio.
As with any investment strategy, understanding and managing risk is a key consideration and with alternative investments that is all the more relevant as it may not always be possible to make apples and apples comparison of products and many will not be bound by the rules that deliver transparency and protection to other asset classes.
Investments such as peer-to-peer lending and crowdfunding are becoming a much more familiar part of the investment landscape and they are considered herein as well as some more esoteric opportunities such as stamps, parking spaces, student accommodation, films or even fine wine, which may admirably fulfil the brief of a liquid asset that suggests a perfectly palatable exit strategy should the market move against you!
Risks of Alternative Investments
With stockmarkets taking a tumble and returns on savings remaining stubbornly low, some may be tempted by alternative investment opportunities they might not otherwise have considered.
Whilst alternative investments may vary greatly from forestry to carbon credits and from micro-brewery to gold bullion, they often carry similar risks; here are some of the key things to consider before making an alternative investment.
Trading Foreign Exchange
Foreign exchange (FX or forex) is the world’s biggest financial market, with individual traders, businesses and central banks all taking part in order to speculate for profit, maintain money supply or facilitate international trade.
There is no central exchange for FX and there are few limits to trading 24 hours a day with a high degree of liquidity via a global network of banks, dealers and brokers.
FX trading is how individuals and businesses convert one currency to another and prices are influenced by a range of different factors, including interest rates, inflation, government policy, employment figures and demand for imports and exports; currency prices tend to reflect the state of the issuing country’s economy.
Because of the sheer volume of currency traders and the amount of money exchanged, price movements can happen very quickly, making currency trading not only the largest financial market in the world, but also one of the most volatile.
What is Peer-to-Peer Lending?
The perpetually low interest environment has caused many savers to seek alternative ways of achieving better return on their cash and peer-to-peer (P2P) lending is an increasingly popular option.
P2P websites enable investors, or savers, to lend directly to borrowers thereby cutting out traditional lenders such as banks or building societies.
Borrowers may benefit from lower loan rates than they’d get from a bank or building society and savers get better returns than they would on a standard savings account.
P2P lenders have been around since 2005 when the UK’s first lender, Zopa, launched and it has lent out £600 million of savers’ money in the decade since then.
The growing number of P2P sites means that there is increasing choice for savers in terms of who they can lend to and the associated risk and reward; originally designed to provide an alternative source of personal loans, it is now possible for the DIY investor to lend to small and medium-sized businesses or even property investors and generate regular income.
What is Equity Crowdfunding?
Equity crowdfunding allows a large number of people to provide money to a start up or early stage business in return for shares in the company.
There are now a huge range of peer-to-peer lending, reward and equity crowdfunding opportunities available to the DIY investor with minimum investments as low as £100 and a large number of platforms to choose from.
Unlike buying shares that are listed on a stock exchange via a broker a whole new industry has been created by platforms and aggregators looking to deliver access to private equity investment.
Equity crowdfunding does have the potential to deliver huge returns and online technology opens up a world full of ‘local’ investment opportunities at the click of a mouse.
Investing in Equity Crowdfunding
Some of the phenomenal successes such as Facebook and Dropbox demonstrate the fantastic returns that can be achieved from early stage investing but a very small proportion of deals are responsible for delivering the vast majority of profitable returns.
If you are considering equity crowdfunding there are some essential guidelines that can help to mitigate what are undoubtedly considerable risks associated with this type of investment.
What is Impact Investing?
The Social Stock Exchange was established in London in 2013, with a mission to create an efficient, universally accessible marketplace where impact investors and impact businesses of all sizes can come together.
Impact investors don’t just want a financial return from the businesses that they invest in, they want to see a positive social impact too; think the complete opposite to the type of investing that caused the near cataclysmic credit crisis.
But it’s not about philanthropy, although philanthropists do make impact investments; it’s about investing in business that are trying to make a difference to society, but also want to financially reward the investors who back them.
Investing for impact doesn’t necessarily mean compromising your returns; the theme has historically been popular with high net worth individuals and private equity houses, but with greater understanding what was once the playground for the rich and retired has now gone mainstream.
Introducing Hedge Funds
One of DIY Investor’s key objectives is to demystify fund management to ensure that the lay investor can grasp the core tenets of a particular fund and make a value judgment about its underlying investments and its overall strategy.
If fund managers make things tough, the hedge fund industry appears to have opacity down to a fine art; here are a few of the basics and some of the terminology associated with this sector.
Hedging is the art of trying to reduce your exposure to a particular asset or risk, often by selling something you don’t own – this is called shorting.
The term hedge fund can cover a multitude of different investment strategies and they tend to be structured as limited liability partnerships or companies. A few will allow an investor to enter or exit on a daily basis but most commonly this will be monthly or quarterly, some are even longer. They invest in all sorts of assets.
They will often include an element of hedging within the investment strategy, which is essentially taking an equal and opposite position to a particular investment.
A short position is a negative holding in an investment – for example, by borrowing shares in a company and then selling them.
A long position is a positive holding – i.e. buying an investment in the hope and expectation that it will go up in value.
Investing in Trade Finance
Everything we consume, wear, and use forms part of global trade, much of which is subject in some way to financing.
Trade finance is a loan that funds the sale or purchase of goods, often across borders; it is one of the oldest forms of banking, and still today forms a large and stable part of global banks lending.
Unlike corporate debt, trade finance is tied to a specific transaction, for example, the shipment of soya beans from Brazil to the US, therefore trade finance loans can be collateralized with the underlying commodity itself and they are self-liquidating – once the sale is complete, the loan is paid off.
Trade finance loans are often short term, between 90 to 120 days depending on the sector, decreasing the duration risk for investors.