Subscribe to get our latest investment news and insights straight to your inbox.

[recaptcha]
Alternative Investments, exotic

What are alternative investments?

There are several definitions of Alternative Investments but there’s one thing they are not: conventional mainstream investments such as shares, cash and bonds.

They’re specifically designed to be as uncorrelated as possible to the usual “market”, that being shorthand for the sharemarket. If possible, Alternatives should show some ability to go up in value while other asset classes have their periodic lurches.

At the professional end of Alternatives sit financial structures such as Venture Capital Funds, Hedge Funds and Private Equity. While there are a few exceptions among Private Equity Funds, most of the above aren’t listed because when sharemarkets take a dive, they take most listed entities with them.

Venture Capital

Venture Capital is all about risky but potentially lucrative startups, while Hedge funds usually build into themselves the right to profit from falling markets by strategies such as holding Put options or “short selling” shares they do not own in the hope of buying them more cheaply to settle the trade. They are run by very “active” managers who often charge two per cent a year plus 20 per cent of any upside they can manage over a specific time period such as a year. That’s much higher than conventional “long only” fund managers.

Private Equity

Private Equity is playing a bigger role nowadays than it did previously. It’s based on the notion that a privately run company can often be more financially successful than one that has to fulfil all the requirements and reportings  associated with sharemarket listing. In many cases Private Equity will take over a listed business, shake it up to be more efficient, then float it again on the sharemarket.

Accessing Alternatives

It’s usually difficult but not impossible for retail investors to get access to those categories of Alternatives, not least because they prefer to see bigger sums of money per investor being sent their way, such as $500,000. Some bigger private investors have got themselves classified as Sophisticated Investors, which has various financial hurdles they have to jump but allows them to be considered wholesale investors. There are also a number of managed funds which specialise in owning slices of those organisations managing Alternatives, thus giving the retail investor access to those hard to find uncorrelated assets.

Something more exotic…

Lower down the scale, asset classes such as precious metals, art, wine, classic cars and antiques can be bought by normal retail investors and are considered to be alternatives although it must be said that when sharemarket and national economies lose confidence, most of those non-necessity asset classes go the same way as there’s not so much disposable cash looking for a home.

It is possible to hold all of those assets in a Self Managed Super Fund (SMSF) but it must be done on an arm’s length basis.  Meaning, if you own a valuable painting or a valuable sports car you may put it in your SMSF but you must not make personal use of it. You can’t hang the painting on your wall or drive that car yourself.

Bear in mind that if you own such assets outside your SMSF, you are only going to pay a moderate level of Capital Gains Tax if you hold them for more than a year before you sell them.

If it’s a car or a motorcycle, there’s no Capital Gains Tax payable anyway. They’re exempt.

There’s no specific rate of CGT in Australia: the capital gain just gets added on to your income and taxed at whatever is your marginal rate of tax.

The good news is If you hold an asset for at least 12 months before you dispose of it, you will be entitled to a 50 per cent discount on the calculated capital gain.

So even if you are on the top 47 per cent marginal tax rate, the rate of tax you are going to pay on your capital gain will be reduced to 23.5 per cent.

 

This article is part of our investing starter series. You can read more of this series here.

These are the views of the author, Andrew Main. This is general in nature and does not take into account your personal circumstances.