When it comes to investing, most people probably think of the basics: shares, bonds, ETFs, and the like. But there are a lot of different asset classes and investment opportunities in the UK, not all of them very common.
Alternative investment opportunities can be a good idea because they provide exposure to sectors you normally would not be exposed to. Alternative investments can also serve as a useful hedge against losses when traditional investments are not doing so well.
So today we are going to talk about some of the best alternative investment ideas for Brits. Keep in mind that the fact that these investments are alternative does not necessarily mean they are safer than other investments. As is the case with all investing, make sure you do your research and only invest what you are willing to lose. Be safe out there!
Best Alternative Investment Opportunities in the UK
1. Peer-to-Peer Lending
Peer-to-peer (P2P) lending is a type of investment structure that allows individuals to loan money to start-up companies so they can get off the ground. The motivation behind P2P lending is a lot like regular investing, but instead of investing in an IPO, you are loaning money to a startup. P2P lending is often a choice for small businesses that might have trouble getting a traditional loan from a large bank.
With P2P lending, you give a certain amount with the promise to pay back, with interest. P2P lending opportunities might also come with equity in the company you are lending to or special products and services for early lenders.
Of course, the main drawback with P2P lending is that small businesses may go broke, then they will default on your loan. Thus, you should always thoroughly research the financial fundamentals of any startup you lend money to. Also, as P2P lending has become more popular in recent years, interest rates have slowly fallen, meaning that interest payments might be lower than in the past. Interest rates have been very low since 2020, though it is believed that they will pick back up going into the back half of 2021 and 2022.
Also, the UK government has said that P2P lending can be included in an ISA account, so you can get tax-free returns on any P2P loans that you make. Not a bad deal, if we say so ourselves.
2. Equity Crowdfunding
Equity crowdfunding is a form of crowdfunding for businesses where funders receive a portion of company equity. In that sense, it is a lot like investing in shares, except it happens before any IPO. Websites like Crowdcube or Seedrs let you invest as little as £10 so you can get a piece of company ownership.
There are two major kinds of equity crowdfunding: one where the investors deal directly with the company and have their name on the shares. The other kind is where the equity crowdfunding platform holds the shares on behalf of investors and manages all the minutiae and clerical aspects of dealing with that equity. The latter option is more common and is the standard model that you see on most crowdfunding platforms. Both models have their pros and cons.
The biggest drawback with equity crowdfunding is the fact that many small businesses fail, and there is the possibility that your investment gets diluted. It is possible that some big investors could put down a ton of money, and shrink your 5% stake to a measly 0.5% stake. So, if you are going to do equity crowdfunding, dilution is a possibility you should prepare for by diversifying your portfolio.
- Also check out our roundup of the best UK crowdfunding platforms.
3. Bridging Finance
A “bridge loan” is a short-term loan granted to property buyers who are in the middle of receiving a larger mortgage loan, but cannot wait. For example, a property owner might need to refurbish or repair some property before they can get buy-to-let financing. Private investors can fill that need and issue short-term loans. Most of the time, private investors invest in a pool of funds so that any risk of default is spread over several investors instead of just one.
Bridging finance is an unorthodox option and usually has a relatively high buy-in amount. Generally, you have to put in around £25,000 as a minimum investment. That being said, the past few years have seen several companies offering bridge loan investment opportunities with smaller minimum investments. For example, LendInvest allows bridge loan investing with a minimum investment of just £100.
One thing to note about bridging finance loans: technically your loan is secured against the property, just like with a regular mortgage.
However, in the case that the borrower defaults, the route to get your money back is not as clear-cut as with a regular mortgage. The upshot is that bridge loans tend to have higher interest rates than traditional loans for the same purpose, so that means more money for you.
Bridge loans are most often given to people waiting for a home loan, but they can also serve to bridge the gap for corporate financing. Smaller companies might take out bridge loans to cover short-term costs while they are securing long-term financing.
Regardless of where you stand on cryptocurrencies, they are proving to be a worthwhile alternative investment opportunity over the past decade. In a nutshell, they are digital/virtual assets that are secured by cryptography on a decentralised ledger, theoretically making them impossible to counterfeit or double-spend.
There are over 4,000 cryptos to choose from in 2021, most of them attempting to solve a particular pain point in centralised finance, in some way, shape or form. Some cryptos like Litecoin are attempting to make crypto fast and scalable so it can be used as digital cash. Other assets like Ether allow smart-contract programming to facilitate decentralised applications. Then you have other assets which are purely speculative investment vehicles.
To be perfectly honest, the entire industry is highly speculative, and while we do believe that decentralised finance has a lot to offer to the world, we recommend exercising caution in this space. As they say, DYOR (Do Your Own Research).
If you’re interested in diving down the rabbithole of crypto investing, check out these articles:
5. Structured Products
Structured products are another interesting alternative assets that give retail investors the ability to invest in derivatives with lower risk. Structured products are pre-defined investment bundles that are made out of assets tied to an index or some other underlying security. Structured products take traditional asset classes and changing the payment structure so that they can customise risk-return objectives.
For example, a structured product might take a regular corporate bond and change the payment structure. So, instead of getting regular payments and a final principal, you might get a larger payoff depending on the future performance of the company. A structured product could offer you a guaranteed 20% on your investment of £1,000 if the FTSE performs above a certain level in 3 years.
Similar to fixed-income investments like bonds, most structured products have a maturation date by which performance outcomes are judged and payments issued.
Structured products are tricky because they are variable and can be highly customised. The basic idea behind them is they allow companies to issue cheap debt by offering exposure to uncommon asset classes. So, if you want to diversify your portfolio, the structured products are an interesting and relatively risk-free investment (at least, compared to the other alternative investments covered here).
6. Buy-to-Let Properties
Buy-to-let properties are properties that owners buy with the intention of renting out, not living in. In the UK, homeowners must have at least 25% of the property value in liquidity to secure a buy-to-let mortgage. Landlords also need to have some cash set aside to handle things like necessary renovations or refurbishments before renting.
However, if you can clear those two hurdles, buy-to-let properties are fantastic investments. Not only do they generate regular income every month in the form of rental payments, but the value of the property will also go up over time, so it’s a double whammy. Of course, buying a property to rent is a very hands-on investment and you will need to do a lot of work in maintaining the property and dealing with tenants.
One major risk of a buy to let property is that (for many landlords) the property is a substantial percentage of their wealth. That means you can be very vulnerable if the housing market crashes or rental prices drop. Also, small landlords have to compete with large institutions that own and rent several properties. At the same time, rental properties can be a good hedge if the stock market falls. After all, most people are not going to stop paying rent no matter the state of the economy.
Buy to let properties can be great alternative investments as long as they are taken care of properly. You just have to be willing to put in the time and effort to research a good property and actively manage tenants, repairs, and any other things relevant to owning property.
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Commodities are a very interesting type of investment. Unlike most other types of securities such as shares, bonds, or investment trusts, commodities have an objective use-value in addition to their exchange value. Many people invest in commodities when they feel that the buying power of fiat currencies such as the GBP or USD is going down. When you invest in a physical commodity, it gives you ownership and control over a small portion of those resources. People always need physical goods so commodities are often used as a hedge against inflation and the depreciating value of government-issued fiat currencies.
Some common commodities that are popular investment decision include:
- Crude oil
- Precious metals (palladium, silver, platinum, etc.)
- Agricultural products (corn, wheat, cotton, etc.)
- Timber and other kinds of wood
- Sugar, salt, and spices
Commodity investments allow sophisticated investors to get in on the supply chain of industries. Originally, commodities were used mostly to match producers and manufacturers. Suppliers can write a contract promising delivery of X amount of commodity by date Y, and buyers can purchase those contracts.
Forward contracts like these are still the most popular kinds of commodity investments, but commodity futures and options have become more common.
These kinds of derivative securities allow people to speculate and make money on the future price movements of physical goods. For example, if an investor expects the price of wood to go up, they can buy an options contract that gives them the right to sell that wood at a predetermined time in the future.
8. Carbon Credits
A carbon credit is a permit that allows the holder to emit a specified amount of carbon or other greenhouse gas emissions. A single carbon credit allows up to one metric ton of carbon dioxide. Carbon credits are part of cap-and-trade policies meant to reduce the total amount of greenhouse gasses emitted. Polluting companies are given a specific amount of credits that put a limit on how much they can pollute. Companies can then sell any unneeded carbon credits for a profit.
The idea behind carbon credits is two-fold:
- Credits directly decrease greenhouse gases emitted by companies by placing strict limits.
- They also incentivize further reductions in emissions as unneeded credits can be sold.
Carbon credits are bought and sold through brokers, trading firms, and other retail investing outlets. You can invest in carbon credits then make a profit by selling them to companies or entities that need more leeway in their emissions.
For example, investors can invest in the KFA Glocal Carbon exchange ETF, which tracks the performance of carbon credits and is indexed to the IHS Market’s Global Carbon Index.
Consider yourself a green investor? Give these a read:
Collectables are a broad category of investments and can include any kind of item that can be sold for more than the original sale price. Generally, the idea behind collectables is to buy a lot when the price is low and wait till the price is high to sell. Pretty much any item can be collectable, but things like stamps, antique furniture, artwork, coins, vinyl records, trading cards, toys, and classic cars are common things collectors buy to sell later.
The main risk behind collectables is that there is no guarantee that they will increase in value. For example, a ton of people bought Beanie Babies many years back expecting them to skyrocket in value in the future, but they never did. Also, the value of collectables can be extremely subjective. They might be worthless to one person but worth a lot to another person. Collectables also need to be in excellent condition to be worth anything, so any imperfections can make them effectively worthless.
Investing is a big field and there are a lot of options aside from the classic choices. These alternative investment ideas can provide some diversification to your portfolio and exposure to uncommon asset classes. Happy investing!
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