Introduction
Most investors think of stocks, bonds, or cash when building a portfolio. But alternative investments — from real estate and private equity to hedge funds and digital assets — are gaining popularity among UK investors looking for diversification, higher returns, and protection against inflation.
This guide explores what alternative investments are, the types available, their benefits, risks, tax considerations, and how to start investing wisely in 2025.
What Are Alternative Investments?
Alternative investments are assets outside traditional markets like equities and fixed income. They often have low correlation with stock market movements, making them ideal for diversification.
Common examples include:
- Property
- Commodities
- Private equity
- Hedge funds
- Cryptocurrencies
- Art and collectibles
- Peer-to-peer (P2P) lending
Benefits of Alternative Investments
| Benefit | Explanation |
|---|---|
| Diversification | Reduces portfolio risk through non-correlated returns. |
| Inflation Hedge | Property, commodities, and infrastructure can preserve purchasing power. |
| Higher Return Potential | Private equity, venture capital, and crypto can offer high upside. |
| Access to Niche Markets | Opportunities beyond traditional stocks and bonds. |
Risks of Alternative Investments
| Risk | Details |
|---|---|
| Illiquidity | Many alternatives lock up your money for years. |
| Complexity | Requires specialist knowledge to assess risks. |
| Regulatory Risks | Especially with crypto and P2P lending. |
| Valuation Challenges | Harder to track real-time prices for assets like art or private companies. |
Types of Alternative Investments
1. Real Estate
Real estate remains one of the most popular alternative investments in the UK.
Ways to invest:
- Buy-to-Let Property: Generate rental income and capital growth.
- Real Estate Investment Trusts (REITs): Publicly traded companies like SEGRO or British Land.
- Property Crowdfunding Platforms: Platforms like Property Partner or CrowdProperty allow smaller investments.
Pros: Stable income, hedge against inflation.
Cons: Requires capital, market downturn risks, maintenance costs.
2. Private Equity and Venture Capital
Private equity involves investing in private companies or startups before they go public.
How to invest:
- Private Equity Funds (e.g., Partners Group, Blackstone)
- Venture Capital Platforms like Seedrs or Crowdcube
Pros: Potential for high returns, early access to innovation.
Cons: High risk, long lock-in periods (5–10 years), limited liquidity.
3. Hedge Funds
Hedge funds pool investor money to implement complex strategies such as short selling, derivatives, or arbitrage.
Pros: Professional management, diverse strategies, potential for consistent returns.
Cons: High fees (often 2% + 20%), minimum investments often start at £100,000+, and less regulation.
4. Commodities
Gold, silver, oil, and agricultural products are traditional alternatives.
Ways to invest:
- Physical commodities
- Exchange-Traded Commodities (ETCs)
- Commodity-focused mutual funds or ETFs
Pros: Inflation hedge, global demand drivers.
Cons: Price volatility, storage costs for physical holdings.
5. Cryptocurrencies and Digital Assets
Bitcoin, Ethereum, and blockchain-based assets have surged in popularity.
Ways to invest:
- Direct crypto purchases on platforms like Coinbase or Kraken
- Crypto ETFs and trusts
- Staking or yield farming for additional income
Pros: High growth potential, innovative technology exposure.
Cons: Extreme volatility, regulatory uncertainty, risk of fraud or loss.
6. Peer-to-Peer (P2P) Lending
Platforms like Funding Circle or Zopa let you lend money to individuals or businesses in exchange for interest.
Pros: Attractive yields, accessible from as little as £10.
Cons: Risk of borrower default, no FSCS protection, platform risks.
7. Art, Wine, and Collectibles
Collectibles like fine art, vintage wine, and rare cars can deliver unique returns.
Pros: Tangible assets, potential for significant appreciation.
Cons: High expertise needed, illiquidity, storage and insurance costs.
8. Infrastructure Investments
Exposure to assets like toll roads, renewable energy, or utilities through infrastructure funds.
Pros: Steady, inflation-linked cash flows.
Cons: High entry costs, limited access for retail investors outside funds.
Tax Considerations for UK Investors
| Investment | Tax Treatment |
|---|---|
| Property | Income tax on rental profits, CGT on sale unless sheltered in a company structure. |
| REITs | Dividends taxed as property income, but can be held in ISAs or SIPPs. |
| Private Equity | CGT on sale, income tax on dividends. |
| Crypto | Subject to CGT; income tax if trading actively. |
| Collectibles | CGT applies if gain exceeds £6,000 (as of 2025). |
| P2P Lending | Interest taxed as income; some platforms allow Innovative Finance ISAs for tax efficiency. |
Building a Diversified Alternative Portfolio
| Investor Type | Suggested Allocation to Alternatives |
|---|---|
| Conservative | 5–10% in low-volatility options like real estate or gold. |
| Balanced | 15–25% spread across real estate, commodities, and P2P lending. |
| Aggressive | 30%+ with private equity, crypto, and hedge funds. |
How to Start with Alternative Investments
- Set Clear Goals – Decide whether you want income, growth, or diversification.
- Research Platforms – Use FCA-regulated platforms for safety.
- Start Small – Begin with liquid alternatives like REITs or ETFs.
- Understand Risks – Illiquidity and volatility are common in alternatives.
- Use Tax Wrappers – Shelter eligible investments in ISAs or SIPPs to minimise tax.
Performance Snapshot
| Asset | Average Annual Return (10 years) | Volatility |
|---|---|---|
| Property (UK average) | 4–7% | Medium |
| Private Equity | 8–12% | High |
| Hedge Funds | 6–8% | Medium |
| Gold | ~5% | Low |
| Crypto (Bitcoin) | Highly variable (~50% annual average early years) | Very High |
| P2P Lending | 4–7% | Low-Medium |
| Art/Collectibles | 3–10% | Medium |
Final Thoughts
Alternative investments can enhance diversification, improve returns, and protect wealth against market volatility and inflation.
However, they require careful due diligence, an understanding of risks, and often a longer investment horizon. For beginners, starting with liquid, regulated options like REITs, ETFs, or P2P platforms provides a safer path into this dynamic space.
