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A private buyer has paid £16 million for a cask of rare Scotch whisky – just one of the thousands of alternative investments.
It’s not known if the spirits lover from Asia plans to drink the tipple or hold on to the single malt distilled by the Ardbeg distillery in 1975 on the isle of Islay as the price includes 88 bottles of the whisky worth £36,000 each.
But whatever the intention, the world record sale price indicates the thirst investors have for alternative investments.
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What Are Alternative Investments?
It’s easier to look at what isn’t an alternative investment than to provide a definition.
Standard investments are stocks and shares, bonds and cash. Everything else is an alternative investment, from gold to a Picasso masterpiece, including fine wine, whisky, real estate, collectibles, and financial instruments, such as hedge funds, venture capital and derivatives.
Other significant alternative investments are cryptocurrency and NFT tokens.
The key points about alternative investments are:
- There are fewer rules, or they are not supervised by a government regulator
- They are challenging to convert to cash
- The risk of investors losing their money is high
How Do Alternative Investments Work?
Institutional investors, private collectors and wealthy individuals tend to own alternative investments to diversify their portfolios.
On average, these investors commit no more than ten per cent of their funds to alternative investments.
More retail investors are moving into the market, mainly by buying into funds that offer shares in an expensive alternative investment whose price would normally remain out of their financial reach.
Affordability is one problem, but others are how to value an alternative investment and where to sell.
Illiquidity – the inability to sell quickly and easily for cash without losing money – can knock a huge percentage off the perceived market value.
Putting a price on the asset is difficult for a scarce object that has remained in storage for decades. After all, more buyers are ready to buy 1,000 shares on Amazon than a 75-year-old bottle of fine wine.
On the other hand, plenty of investors have made their fortunes from buying property, gold or art and antiques. Another favourite is collecting classic cars.
Alternative Investment Scams
The lawless nature of alternative investment marketplaces has led the sector to gain a reputation for scams.
Fraudsters are always lurking in the shadows, ready to rip off the unwary or inexperienced.
The first move that should trigger a suspected con-trick is a call or conversation out of the blue, as most North American and European countries regulate advice firms, which are not allowed to cold-call.
If you have doubts about a deal, keep your money in the bank and think: “Why me?”
After all, if an investment opportunity is that good, why isn’t the proposer taking advantage instead of reaping commissions from investors?
Although cryptocurrency has a bad rep for scams, the same problems infest all other alternative investments as fraudsters try to pull the wool over the eyes of investors.
The threat from scammers means buyers should carry out extensive due diligence when considering an alternative investment.
Buying Alternative Investments
Alternative investments often come into their own when stocks and shares are struggling.
Most alternative markets move without any correlation with stock exchanges.
Gold, for instance, is the go-to investment for many when other markets start to head south. That’s because the precious metal has steadfastly stood as a store of wealth in troubled times.
Cryptocurrency is one of the most-talked about alternative investments. Bitcoin has hit a price as high as $67,000 recently – but dropped two-thirds in value within weeks. Cryptocurrency represents what can happen to an unregulated alternative investment open to manipulation by wealthy investors.
How to buy an alternative investment depends on the type of asset.
Precious metals and commodities – like wheat and oil – have specialist exchanges. Art and antiques are more likely to go to auction, while many sales are private deals.
Rather than investing directly, it’s possible to buy a stake in an alternative investment through a fund or ETF (Exchange traded fund). These publicly traded funds are safer for ordinary investors as they are mostly regulated but are still risky as the managers may have a limited trading history.
What’s Hot On The Alternative Investment Market?
The odd multimillion pound deal like the sale of the cask of Scotch whisky comes up now and then, but the two alt hotspots at the moment are collectibles, NFTs and cryptocurrency.
But collectibles in boxed and in good condition are rarer than most collectors think and probably worth less than expected. That’s because their time has passed, and although they were desirable in the past, tastes have moved on.
The top tip is to buy toys based on movie characters and keep them pristine in unopened packaging.
NFTs are cryptocurrency tokens with ownership linked to a blockchain. The tokens are artwork, music or a snatch of video. The most expensive have sold for millions, while most are easily affordable and available from online platforms that act as galleries.
Collectors buy NFTs with cryptocurrency. Ether is one of the most popular NFT tokens.
Alternative Investments FAQ
Alternative investments will likely come with two giveaways – high fees and a significant minimum investment. Other features include illiquidity and lack of financial data.
In general, the earnings from investments are tax-treated as income, and the profits made from the sale are capital gains. As most alternative investments do not generate income, they are likely commodities which attract capital gains tax on the sale or transfer of the asset.
Liquidity is the ability to convert an investment into cash quickly. For example, stocks and shares are sold on the day at a price set by the market but deciding how much an antique Chinese vase is worth means consulting experts and searching for a buyer.
The returns can vary widely. For example, as of January 2022, a real estate ETF had an annualised return over five years of 6.17 per cent, while an oil and gas exploration ETF lost 6.4 per cent in value.
Looking online is probably the best bet – try specialist forums, social media, dealers, and even keep an eye on auction sites like eBay. Antique or car boot sales are another source of collectibles.
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