Blog courtesy of Neil Ryder
1. MYTH: Alternative Investments are highly risky
ALTERNATIVE VIEW: Perhaps the main reason why Alternatives are perceived to be risky is because the market is not regulated by the Financial Conduct Authority. Should anything go wrong with your investment in this arena there is no recourse to the Financial Services Compensation scheme.
Does this mean therefore that anything that is regulated by the FCA must necessarily be low risk? Of course not. Whatever market you’re in, unless an investment is asset-backed – say by a property or business venture – then it is speculative and higher risk.
2. MYTH: Alternatives are only for reckless people with more money than sense.
ALTERNATIVE VIEW: In terms of how much money you need to begin investing in Alternatives, the market is becoming increasingly accessible to more investors with lower barriers to entry.
Needless to say, even if you’ve only got £100 to invest and you put it all into a scheme that you don’t understand, you are being reckless. It’s vital to educate yourself about any market you are entering before putting in any amount of investment.
3. MYTH: Alternative Investments represent highly speculative asset classes
ALTERNATIVE VIEW: Alternative Investments include assets such as currency, commodities, private businesses, and, wait for it, property.
Yes – one of the commonest investments that most people in the UK already make or aspire to making is an Alternative Investment. You won’t find it on the Stock Exchange, it isn’t regulated by the FCA, and if you do a private deal that goes wrong there’s no compensation available.
But there is an underpinning asset over which the investment has a first charge. When it goes wrong you can repossess the asset, sell it and recover most or all of your money. Something that you can’t do when shares fall in value!
4. MYTH: Alternative Investments are more volatile than traditional stocks.
ALTERNATIVE VIEW: Many investors include Alternatives in their portfolio to balance out the inherent volatility of their traditional stocks and shares.
Furthermore, adding them into your investment mix can help to mitigate risk due to the diverse fund types, investment strategies and management structures deployed in the Alternatives market.
5. MYTH: Alternative Investments don’t have standardised management structures, which adds to their risk.
ALTERNATIVE VIEW: The flexibility of Alternatives’ management structures is one of the reasons they cannot be regulated, and perhaps this adds to the suspicion that they are largely scams.
But there are clear reasons behind their flexibility. They may have to be structured in different ways to meet different management, risk/return, legal and liquidity criteria, according to the interests of the investors.
Of course this makes the assumption that the vast majority of investors are not attempting to defraud the system.
Interestingly the more an investment market attempts to align itself more closely with the interests of the investors themselves, as opposed to the financial industry, the more likely it is to be an Alternative Investment, and the less likely are the regulators to want to bother with it.
BONUS MYTH: Alternative Investments make use of all sorts of mysterious investment products and approaches, like hedge funds, futures and derivatives. So they must be dodgey.
ALTERNATIVE VIEW: Not all of these products are exclusively Alternative. Many fund managers in the traditional investment market make use of derivatives as a means of managing risk. Futures contracts are a standard agreement about the purchase of an asset at a specific price and time in the future.
Both traditional and Alternative markets use similar investment strategies on traditional stock. But it is only the non-regulated Alternative market that is vilified for it.
As with all investment decisions the best advice is do your homework, find out the facts and challenge the so-called received wisdom of popular opinion.
Get in touch to arrange a free, no obligation 60 minute review, either face to face or online, to understand more about investing in Alternatives – and which schemes might be right for you.
Email firstname.lastname@example.org. Telephone 01793 858215