Understandings the risks and rewards of alternative investments

These involve investing in assets outside traditional options such as publicly listed shares, bonds or cash. They are usually held alongside traditional investments to help diversify portfolios and support long-term financial goals.

Alternative investments can include:

• Investments in privately owned companies that aren't listed on public stock exchanges, such as the London Stock Exchange
• Property and real estate, including infrastructure like roads, bridges, energy networks and utilities
• Commodities such as oil and natural gas, and physical assets including collectibles
• Specialist funds that invest in assets outside traditional shares and bonds, such as hedge funds and venture capital

Because they sit outside public markets, alternative investments often behave differently from shares and bonds, which is particularly noticeable during periods of stock market ups and downs. For this reason, they are usually considered as part of a long-term investment plan rather than a short-term option. 

Alternative investments also come with important considerations. They can carry higher levels of risk, involve longer investment periods, be harder to sell quickly, and come with higher or more complex fees.

As a result, they are better suited to experienced investors or those taking professional financial advice.

Read more about what alternative investments are and how they work.

How alternative investments fit into an investment strategy

Alternative investments typically complement traditional investments, rather than replace them. Within a wider strategy, they can help:

• spread risk across a wider range of assets
• reduce reliance on stock and bond markets
• support long-term growth or diversification goals.

Because they can be more complex and higher risk, they’re usually considered within a carefully thought-out strategy based on your goals, attitude to risk and investment timeframe.

Learn more about building an investment strategy.

Alternative investments can play a role in some investment strategies, but are not suitable for everyone. They often carry risks that differ from traditional investments. It’s important to understand these before investing.

Liquidity risk

Alternative investments are often less liquid, which can lock up your money and make selling early difficult or costly.

Valuation challenges

Alternative investments can be hard to value, with limited or delayed information on what they’re worth.

Complexity and specialist knowledge requirements

Returns from alternative investments can be complex and harder to understand or compare, making losses more difficult to assess. Research and professional advice can help reduce this risk.

Regulatory and legal considerations

Some alternative investments are unregulated and not covered by the FSCS, meaning you may not be entitled to compensation.

Variation in risk levels

Risk varies between alternative investments, and some could result in significant losses or losing all your money.

Alternative investments offer different features from traditional assets like shares and bonds. While they are not suitable for everyone, and returns are never guaranteed, alternative investments can play a role in a well diversified, long-term investment strategy.

Why investors consider alternative investments

Investors may consider them to broaden their portfolio, access different types of opportunities, and reduce reliance on stock and bond markets. Because alternative assets often behave differently, they can help create a more balanced portfolio when used carefully.

Diversification and reduced correlation

Alternative investments have the potential to improve diversification. They may have a lower correlation with stock and bond markets and respond differently to economic or market conditions. This can help spread risk and reduce the impact of market volatility, though diversification doesn’t remove risk or guarantee returns.

Potential for higher returns

Some alternative investment areas, such as private equity or venture capital, offer the potential for higher returns over the long term. This is often linked to higher risk and investing for longer periods. Outcomes are uncertain and losses can be significant, so these investments typically suit investors comfortable with higher risk.

Access to unique investment opportunities

Alternative investments can provide exposure not usually available through conventional portfolios, including property and real estate, commodities and natural resources, infrastructure projects, and private companies. These assets can offer different sources of potential return and may appeal to investors looking for opportunities beyond listed markets.

Inflation-hedging characteristics

Some alternative assets have properties that may protect against inflation. For example, property may benefit from rising rents and asset values over time and commodities, like gold and silver, can sometimes increase in value when inflation rises. While this does not guarantee protection against inflation, these characteristics may be attractive in periods of rising prices.

Growing role in long-term investment strategies

Alternative investments play an increasing role in long term investment strategies, particularly among institutional investors such as pension schemes. This reflects a focus on diversification, longer investment timeframes, and outcomes beyond short term market movements.

For individual investors, this highlights how alternative investments – used carefully and with advice – may form part of a broader, long-term approach.

Because alternative investments are often complex, it’s important to take a considered approach. Understanding the risks, costs and long term commitment involved can help you decide whether these investments are right for you.

Five steps to consider before investing

1. Clarify your goals
   Consider what you want to achieve and how alternative investments fit your plans.
2. Understand your appetite for risk
   Consider whether you’re comfortable with potential losses and limited access to funds.
3. Do your research
   Take the time to understand how an investment works and the key risks.
4. Choose a suitable manager or platform
   Understand how these investments are managed and what charges apply.
5. Consider professional investment advice
   Talk to a financial adviser, who can help assess whether alternative investments suit your circumstances.

Understanding the practical considerations

Different ways of investing in alternative assets can involve different commitments:

• Minimum investment amounts
  They often have higher minimum entry levels than traditional investments, particularly in areas such as private equity or property funds.
• Fees and charges
  Costs can be higher, more varied and may include management and performance-related fees. These charges can affect the overall return you receive.
• Access to your money
  With many alternative investments designed to be held for the long term, your money may be tied up for several years, with limited opportunities to sell or withdraw early.

Alternative investments usually form part of a longer term financial plan and may not be suitable for everyone. Because of this, you may want to speak to a financial adviser to get tailored advice before deciding to invest. An adviser will charge you for their services, but it’s worth taking the time to fully understand the investments you’re considering, especially if they fall outside traditional investments.