Banking 101 -
Exploring the pros and cons of alternative investments
Alternative investments have become an increasingly popular diversification tool for portfolios. While traditional investments offer stability, alternative investments offer the potential for higher returns – but are they worth it? In this article, we explore some of the pros and cons.
What is an alternative investment?
Alternative investments fall outside traditional investment categories such as stocks, bonds, or cash. Private equity, hedge funds, commodities, and collectables, are examples of alternative investments. Private equity involves investing in private companies, while hedge funds employ a wide range of strategies. Commodities are tangible assets such as energy, metals, and agricultural goods. Collectables, including art, wine, and jewellery, can be rewarding investments, but their value can be challenging to assess and is not guaranteed to appreciate over time.
- Potential for high returns: Private equity, commodities, and real estate offer the potential for higher returns than traditional investments.
- Diversification: Alternative investments offer diversification and can help reduce portfolio risk.
- Higher Risk: These types of investments typically have a higher risk profile than traditional ones, which may not be suitable for all investors.
- Lack of risk management: Certain alternative investments may not be authorised or licensed. As a result, asset managers or providers may not adhere to the same governance standards regarding risk controls, reporting and transparency.
- Lack of Transparency: Assets are often assessed based on information provided by investment providers rather than traded on a public market like bonds or shares. This lack of transparency can make it challenging to understand how the asset is performing and whether it is achieving investment goals accurately.
Although alternative investments carry greater risk, they are often viewed as a successful diversification strategy. However, due to the nuanced and complex nature of the alternative investment market, it is crucial to assess all potential risks, not just the potential reward. Many investors delegate this responsibility to professional investment managers for this reason.
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Further reading about Business Exit
Sophisticated investors consistently seek out ways to diversify portfolios and preserve wealth over the longer term. One vehicle you may have considered including in your portfolios, is a hedge fund.
If you are looking for a hassle-free approach to investing that can be tailored to your individual financial needs and goals, discretionary portfolio management may be the right choice for you.
Investing is not just about making money, but preserving it, making wise financial decisions, and leaving a legacy for your family and the causes you care about.
This communication should be considered a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is for information purposes only and does not constitute advice, a solicitation, recommendation or an offer to buy or sell any security or other investment or banking product or service. You should seek professional advice before making any investment decision. The value of investments, and the income from them can fall as well as rise, and may be affected by exchange rate fluctuations. Investors could get back less than they invest. Past performance is not a reliable indicator of future results. The tax treatment of investments depends upon individual circumstances and may be subject to change.
The contents of this communication are based on opinions or conditions as at the date of writing and may change without notice. To the extent permitted by law or regulation, no warranty of accuracy or completeness of this information is given and no liability is accepted for its use or reliance on it.