Alternative Outlook

Investment is not all about the end result; the process of isolating and finalising a new opportunity can provide great enjoyment and give you a real buzz. Alternative investments are particularly great for this, it is hugely satisfying to sniff out a profitable yet unusual area for investment and then make a return on it. This taste of the exotic means there is more of a sense of adventure when you are investing in carbon credits in the Brazilian rainforest, for example, compared to when you buy shares in a local pharmaceutical company.

It is a big year for Carbon Credits as they are set to come into their own at the end of 2012 when the Kyoto Protocol expires. The Kyoto Protocol is an international agreement setting targets for industrialised countries to cut their greenhouse gas emissions.

The expiration of this agreement will see a large rise in Voluntary Emissions Reductions (VERs) which are a type of credit that fall outside the guidelines and obligations of Kyoto, and thus open up a wider range of initiatives designed to reduce greenhouse gas emissions. This sort of investment can not only be profitable but is hugely satisfying as an investor knows that he or she is helping the environment too.

Another benefit of alternative investments is that they are tangible. If an investor buys bonds, more often than not they will feel little attachment to the investment. However alternative investments provide the investor with the opportunity to enjoy and get practical use from their investments whilst still making money on them. For example if an investor decided to invest in a plot of land, they could easily use it as an allotment for example without losing any value on the land.

Likewise some investors enjoy investing in commodities for the same reasons. Collecting things is a hobby for a lot of people and can easily be turned into a profitable investment. Many people invest in fine wines and enjoy the excitement of building up an eclectic cellar as much as they do making money on it.

Equally by owning something tangible, alternative investments provide welcome psychological security for investors. In the current turbulent economic climate, investors are fearful of the value of their investment suddenly plummeting or a company sliding out of business.

Alternative investments can be comforting for investors, which is often why, at Tullett Brown, we see so many of our investors take physical delivery of their investments. In 2010 just 1% of our clients took physical delivery of their commodities but that figure shot up to 10% in 2011.

Often an investor will sleep better knowing their investment is locked up in their safe, its value protected, rather than fluctuating at the mercy of the markets.

This psychology goes back to the days of the Great Depression in the 1930s when the Executive Order 6102 saw the hoarding of gold made illegal by the US government and the metal was confiscated by authorities. At the time this led to a deep mistrust of the market and people from then onwards started to take delivery of the gold from goldsmiths to keep it locked up and safe.

The parallels that his has with the public’s mistrust of the modern banking system, hardly needs pointing out, which is why, in this uncertain global climate, the security of alternative investments is an attractive feature for any savvy investor.

By Dan Fox, Senior Portfolio Manager at City commodities broker Tullett Brown