Investing in alternative assets comes with big questions

Whether it’s whisky, hedge funds, art or agriculture, people thinking about unusual investments should ask questions first.

Some investors say there are only three pure forms of assets – real estate, businesses and money – and every other investment is derived from them.

Try telling that to the promoters, and buyers, of alternative assets that have given the world ostrich farming, timber plantations, crowd-funding platforms, hedge funds and more recently cryptocurrencies created from thin air.

The definition of an alternative asset can vary widely, and some reach astronomical heights. Bitcoin’s market value hit more than $1.5 trillion in 2021, but has more than halved in value since.

Some people say alternative investments are artworks, stamps and coins, while the more financially-nerdy focus on call options, convertible bonds, private credit and structured finance.

Whatever you believe, they are different from regular company shares, a house sitting on land, or cash in the bank, and money experts warn they usually come with greater risk. Bigger rewards are possible too, they say, but only for those who truly understand what they are doing.

Problems with cows

Wealth for Life Financial Planning principal Rex Whitford said one of the reasons he became a financial planner after returning from the Gulf War in the early 1990s was “I got terrible advice on a Holstein breeding project”.

It involved impregnating cows with valuable Holstein embryos but there were lactating problems, feed problems, dead cow problems and Australian Taxation Office problems, he said.

Cryptocurrencies and NFTs have been high-profile alternative investments. Picture: iStock

“What is the purpose of an investment – is it to entertain or to create wealth?” Mr Whitford said.

“If you are so wealthy that you can afford to burn cash, knock yourself out,” he said.

Most investors were better off with a “boring as bat sh*t” approach involving a diverse range of proven investments, Mr Whitford said.

He said people often focused too much on assets and not enough on important strategies.

“That’s not to say you can’t make money with these things, but more often than not you need a specialist skill.”

Mr Whitford said gold and bitcoin were “purely speculative”, while stamps and rare coins were popular among some people but unless you knew a lot about them people you might lose money.

“It’s the people creating the alternative who make the money from suckers looking to corner the market on ostrich eggs,” he said.

“Sometimes there are tax deductions behind them, but nobody got wealthy by tax deductions.”

Get smart

Author and CEO of alternative asset marketplace iPartners Travis Miller said investing in alternatives was about “being smart and knowing where to look”.

“Wherever there’s a scarcity of capital or knowledge, there’s an opportunity,” Mr Miller said in his new book, Grow Your Wealth Faster with Alternative Assets.

“The percentage of alternative assets that people generally have in their portfolios is currently quite low, perhaps around 5 per cent,” he said.

“To really make your money work for you, I suggest allocating approximately 20 to 30 per cent in alternatives as a good starting point.” However, Mr Miller views property as an alternative asset – something that 2.2 million residential real estate investors and millions more with property trusts in their portfolios and superannuation would probably disagree about.

He said investors should be wary of vague promises about investment returns when looking for alternative assets.

“Words such as ‘expected’, ‘potentially’ and ‘targeted’ are red flags because they are not definitive.”

Also ask an alternative asset promoter how much they are investing themselves. “If the answer is zero, that’s another big red flag,” Mr Miller said.

“Risks exist in every investment opportunity – which is why you get a return greater than 0 per cent – but this doesn’t mean it’s fine to take a cavalier approach.”

Remember the ostrich boom in the 1990s? The ostriches don’t, because most were put down.

Early stage investments in businesses are another alternative strategy, and can be in the form of crowd-funding platforms, angel investors or seed capital investors.

“I personally don’t like direct investing at the angel and seed capital stages,” Mr Miller said.

“They are a bit like hope loans. The range of potential outcomes is simply too wide, the risk is too great and the required due diligence significant.”

Passion purchases

Mr Miller said some people invested in “passion assets” – things they loved such as prestige cars, art, stamps and furniture.

“They are a genuine asset class, but I don’t like them from an investor perspective because there are large commissions payable on entry and exit, as well as being an insider’s market,” he said.

“This makes the valuation of the assets very cloudy. For example, the commission on art can be as high as 20 or 30 per cent for both buying and selling. From an economics perspective, it just doesn’t strike me as a good trade.

“I think the value of these assets is the pleasure side of it … I’m sure the specialists in the field can make money, but for the rest of us, I suspect it will always be tough.”

A new report by Knight Frank examining luxury assets shows that over the past 10 years, the best performing luxury investment asset has been rare whisky, up 322 per cent, although its value fell 4 per cent in 2022-23.

This was followed by wine (up 149 per cent), watches (147 per cent), classic cars (118 per cent) and art (109 per cent).

Knight Frank head of residential research Michelle Ciesielski said people were still willing to spend on personal luxury investments despite economic uncertainty and interest rate rises.

Ms Ciesielski said in the past year wine and classic car markets had slowed down from their previous years’ double-digit rises.

“Despite the investible car market being up 5 per cent on an annual basis, it has fallen 7 per cent so far this year off-the-back of the mixed performance of classic cars,” she said.

“We may experience a similar trajectory with the performance of art collections over the coming year given the slower auction results in 2023.”

Crypto controversy

Bitcoin and other cryptocurrencies continue to attract both criticism and support. Despite heavy falls in the last two years, they are still worth hundreds of billions of dollars combined.

Crypto spawned a boom of non-fungible tokens (NFTs) that give people digital ownership of artworks, collectibles and other assets, but NFTs went worse than crypto in 2022 with trading values sinking almost 90 per cent.

Knight Frank’s report says crypto, NFTs and blockchain will ultimately become part of people’s every day. “The fashion world is recognising that blockchain technology provides an opportunity to connect with the digitally native luxury consumer of the future,” it says.

Rare whisky has been the best luxury investment of the past decade, Knight Frank says.

CreationWealth senior financial adviser Andrew Zbik said he saw value in the blockchain technology underpinning cryptocurrencies and NFTs, “however, paying $600,000 for a flying pig that everyone talks about … I can’t see value in that”.

Gold was another speculative alternative asset, Mr Zbik said.

“It doesn’t produce an income – people say it’s fundamentals, but it’s speculative,” he said.

“It’s a rock that we value a lot. What’s the logic behind it? It’s shiny.”

Mr Zbik said higher-risk investors tended to own more alternative assets, of which “a lot can be highly illiquid”.

The weirdest alternative investment he had seen was a bookmakers’ fund that placed bets on horse races based on a set formula. That’s an “investment” that gambles on gambling, so it seems nothing is too weird to be an alternative investment. But will it be profitable?

“The key test is do you truly understand what it is, and who would you be selling it to in the future,” Mr Zbik said.

Don’t lose sleep

Financial Strategist Theo Marinis said many people bought into alternatives because they were trying to get higher returns, but it was usually speculation.

“If you really want a punt, put it on red or black at the casino and you will know pretty quickly,” he said.

“If you don’t understand it, don’t buy it.

“If you are going to do it, do it with a small portion of your portfolio – an amount you are prepared to lose if it goes bad.

“If you are going to lose sleep over it, you have put too much into it. That may be $100 for somebody, it might be $10,000 or $100,000 for others.”

Mr Marinis said cryptocurrency was “not really an asset”.

“There’s nothing underlying it – it’s driven by people pushing the price up and it’s just a big speculative hedge,” he said.

“Human beings want instant gratification, and the alternative stuff offers the opportunity and instant payback, but it doesn’t in the long term. Then you are chasing losses and throwing more money at a bad idea.”