When most people hear the term investment their minds likely go to shares, bonds, real estate and cash. This is what we would call ‘traditional’ investments, and as its name would suggest, alternative investments tend to be a little more left-field.
There are pros and cons to alternative investments. You may find you want to establish yourself with more traditional investments first before delving in to the world of alternative investments, but read on to learn what less-conventional assets offer the potential opportunity of return.
Let’s break it down
Essentially, anything that can increase/decrease in value over time may be considered an investment, but alternative investments can be split into three major categories: hedge funds, commodities and collectibles.
While you can turn to an exchange for some commodities by investing in ETFs, the buying and selling of alternative investments is by no means limited to the stock exchange.
Hedge funds could be considered an alternative investment in the sense these funds are often invested in assets that are less conventional – this could be anything from recording rights, to privately-owned businesses, start-ups etc. Often, hedge funds also trade in derivatives. Hedge managers are responsible for investing a pool of money from the investors according to the hedge fund’s strategy.
Assets may be considered more volatile in a hedge fund setup, and accounts are quite actively managed, sometimes even more so than in a managed fund. Unlike managed funds, hedge funds are not readily available to the public and are privately owned and offered to select investors. Because of this, hedge funds are not considered easily accessible to many Australians.
Gold is in vogue at the moment, it seems. Not just on your favourite piece of jewellery, but in the Australian stock market; 2019 was a great year for the commodity.
Aside from the precious metal, there are several classes of commodity investors may look in to: energy, agriculture, livestock and meat.
Energy refers to things like natural gas or crude oil, agriculture includes farming crops like rice or wheat, and livestock and meat refers to, well, livestock and meat. This doesn’t mean you need to go out and purchase a herd of cattle or offshore oil rig – there are several ways to invest in commodities.
Future Contracts, an agreement in which a fixed price is set to be paid later upon agreeing to purchase a certain quantity of product, are also an option of obtaining commodities. Often, it is commercial users who participate in the futures markets; the airline industry is a strong example. As an industry they are heavily reliant on fuel and thus highly susceptible to changes in fuel price. Thus, many airlines often opt to enter in to a futures contract to mitigate the risk of a fuel price-hike. To purchase Futures you either have to go through a broker that deals with them, or open your own brokerage account.
For the individual Australian investor interested in investing in commodities you may look in to ETFs that contain stocks in companies related to one of the above commodities.
Collectibles, by their dictionary definition, are any item valued and sought by collectors, from cars, to figurines, antiques, watches, LEGO… you name it. If there’s a market for it, it can be a collector’s item. Some investors may choose to invest in classic cars, others may look in to art, and there are far more obscure investments out there.
In an article by the ABC it was reported certain Star Wars figurines have had an average return of 20% annually, and the emergence of ‘Bronies’ (male enthusiasts of the TV Show My Little Pony) have seen some My Little Pony sets generate return rates of up to 33%.
Tune in to BBC One’s ‘Antique Roadshow’ and you’ll likely see members of the public pleasantly shocked by the value of an item that has been lying untouched in their attic – for instance the owner of a 45-year-old Gold Leica 2 Lexus Camera, which auctioned for the equivalent of over AU$600,000.
While there are some people out there lucky enough to be sitting on items that have amassed tremendous worth over the years, many investors actively put in the work and research in growing collections they expect to increase in value.
There are of course pros and cons of investing in collectables, and a host of caveats that may affect your returns, which is why it’s important to understand how an approach to investing in collectibles may differ from traditional investing.
While there is a wealth of knowledge and resources on the share market – historical trends and dips, expert fund and investment managers, financial analysts – the same breadth of knowledge isn’t as readily available on collectible investments. Experts exist, but the information isn’t necessarily as common or accessible.
You may also find comparisons among collectibles can be difficult. In the share market, a share is often a share is often a share. When comparing collectibles, factors like condition can impact the price, which may be misleading when you’re trying to valuate your own items. The other thing to consider when investing in collectibles is how easy it may be to find a buyer. While there may be certain individuals willing to pay a high price for the item, finding said individuals can prove challenging. For this reason, collectable items may not be considered highly liquid.
Collectibles are also a physical asset, meaning they are at potential risk of destruction or theft. Contents insurance may be something Collectibles Investors wish to consider.
The below table features Contents Insurers in NSW and ACT, based off a contents value of over $75k.
Are alternative investments right for you?
At the end of the day, the choice to invest in alternatives will ultimately be a personal one based on your situation and financial needs. As with any investment decision there are positives and negatives, and these will fluctuate based on the individual.
Alternative investments may offer a way to diversify your portfolio, or pursue a passion project. We recommend consulting a professional finance adviser or broker prior to making any investment decisions if you are unsure.