Investigate Alternative Assets and Strategies

Looking at asset classes that may move in a different way is another form of hedging — in other words, maintaining the value of your capital even in falling markets, in the UK and around the world. One example is that of balancing an investment in the FTSE 100 equity market with an investment in government gilts (government gilts move in the opposite direction to local shares).

Another idea is to think unconventionally and look to invest in asset classes where the price isn’t affected by the ebb and flow of local shares, such as investing in litigation funds or aircraft leasing structures or putting money into gold funds or agricultural commodities.

Nothing much necessarily links these disparate ideas except that they may move up or down in value based on processes that have no impact on the FTSE 100 benchmark index. For instance, gold is a classic alternative hedge because its price is usually determined by factors that have little to do with UK interest rates.

Equally, investing in forests in Latin America (a big new alternative asset) usually has almost nothing to do with the UK interest rate cycle or inflation rates.

Alternative assets are much in demand at the moment among a certain type of adventurous investor. In an ideal world they can provide extra diversification benefits and sometimes act as a hedge to mainstream shares. But alternative assets are by their nature alternative, which means that not everyone is into them.

Therefore, their markets may be small and without a massive constant supply of sellers and buyers looking to set a price (unlike with shares and bonds where market liquidity is nearly always deep and global). This situation can produce relatively illiquid markets where the difference between the asking and selling price (called the bid offer spread) can be huge.

Also, prices can collapse with a sudden surfeit of sellers looking to raise cash quickly and very few buyers.

blog comments powered by Disqus