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How clients should invest in alternatives

This article is part of
Guide to Alternative Investments

“Most independent advisers don’t recommend these products as AIs are unregulated so there’s no protection, no compensation for investors should they lose their money,” says Adrian Lowcock, senior research analyst at Hargreaves Lansdown.

“For example, I know that wine prices had risen in recent years – although I have no idea where they are precisely now – and know what I like to drink when I buy wine but I would not know what to look for in a wine fund.”

Brett Williams, managing partner of Old Burlington Investments, adds that as there is such a wide range of AI, with highly varied levels of complexity, transparency and governance, if an adviser wishes to help a client with this area they “should first ascertain if an AI is suitable, taking into account the AI’s characteristics as well as the investor’s individual circumstances”.

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“Investors should only invest in AIs as part of a well-diversified portfolio,” he stresses.

Mr Williams suggests the Enterprise Investment Scheme (EIS) as one possible outlet. “Investors are incentivised through income tax rebates on investments, which can offer both downside protection as well tax free capital gains.”

For most AIs, there are two ways to invest: directly or indirectly through a fund. Invest directly, such as by buying specific piece of art or a car, notes Mr Lowcock, and the client will actually have the physical item in their position and can enjoy the aesthetic value. This might make up for, or indeed far outweigh, any small loss in value.

If investing through a fund, Mr Lowcock says: “These fund usually invest in one type of alternative investments, such as wine. Funds are often unauthorised and not regulated by the FSA so investors do not get the same levels of protection as with authorised investments.”

He proposes that the best thing to do for a determined potential fine wine or fine art investor would be to “start speaking to experts, doing some background reading, visiting art galleries or going to tasting evenings would help build up your knowledge”.

“I recommend investors should have a genuine interest in the alternative investment first before investing. That way you invest firstly for the appreciation you get from the piece of art or from researching specific bottles of wine. Then the investment is a secondary issue.”

Then an investment can be made via most Sipps for unauthorised or authorised funds, although not all Sipps will allow this and the costs may be a lot higher, adds Mr Lowcock. “You can put AIs such as classic cars or wine directly into a Sipp.”