A typical investment portfolio holds four main asset classes: listed equities, property shares, fixed interest securities and cash.

Traditionally, all four asset classes behaved differently, depending on the economic conditions. For example, when equity prices fell, fixed interest prices would be expected to rise.

This is not always the case, and many investors are seeking a higher degree of diversification than the main asset classes alone can provide.

An Alternative Investment is simply an investment that falls outside the main asset classes. There is wide variation within this definition, and alternative investments can serve a number of different purposes within a portfolio.

Many are not suitable for most investors, whilst others can offer welcome diversification within any mainstream portfolio.

We have created this guide to explain the main types of alternative investments, consider when they might be beneficial and look at some of the potential risks and drawbacks.

The Alternative Investment Market (AIM)

The Alternative Investment Market does include equities. However, these are not listed on the main stock exchanges and cannot always be traded as easily.

AIM companies are often smaller, riskier prospects with high growth potential. They have usually expanded beyond the scope of private equity funding, but are not quite at the level of a fully-grown financial times stock exchange (FTSE) company.

AIM stocks are not as stringently regulated as companies listed on the main exchange.

Certain tax benefits are available when buying AIM shares, for example:

AIM shares are often exempt from stamp duty when purchased through certain platforms, although exceptions can apply.
If held for two years, the shares can benefit from inheritance tax relief, although this will depend on the company (and the rules around relief are changing in 2026).

AIM stocks have become more mainstream in recent years, and can even be held in an ISA.

Financial Products

A number of financial products can be considered alternative investments, for example:

Enterprise Investment Schemes (EIS)

An EIS will hold the shares of multiple smaller companies, many of which may also be listed on the AIM exchange.

The portfolio will benefit from many of the same features as AIM stocks, but should be considered equally high risk.

To encourage investment in smaller companies, additional tax benefits are available:

Income tax relief can be claimed on the initial investment.
Gains that have been realised by selling other investments can be deferred by re-investing in an EIS.
Capital gains on the EIS fund are free of tax.

Venture Capital Trusts

A Venture Capital Trust is a listed company in its own right. Rather than trading, the VCT aims to make a profit by buying the shares of smaller companies.

Dividends from a VCT are free of tax, and income tax relief can be claimed on the investment amount. No capital gains tax applies on the investment growth.

EIS and VCT investments are high-risk, but offer high growth potential. They are mainly used for the tax benefits, particularly when ISA and pension allowances have been fully used. Tax relief can be withdrawn if the investments are not held for a minimum holding period.

Structured Products

A structured product aims to participate in the growth of a particular market or index, whilst limiting some of the potential downside.

Some plans are fully guaranteed, while others may lose money if the investment doesn’t perform as expected. Generally, the higher the potential reward, the higher the risk.

Structured products can often be held in an ISA and can complement a diversified investment portfolio.

While regulated, structured products may not be appropriate for all investors due to their complexity and the risk of capital loss in non-capital protected versions.

Other Asset Types

These alternative investments are often out of the reach of individual investors due to their minimum investment amounts or the level of risk and complexity. However, they may form part of any mainstream investment fund or managed portfolio:

Hedge Funds – An investment fund which holds a variety of assets and employs complex trading techniques, aiming to achieve an absolute return in all market conditions.

Private Equity – Investment in smaller, higher-risk businesses.

Direct Property – For example, shares in hotels or student accommodation.

Commodities – Tangible assets such as gold, silver or food products. In addition to buying these assets directly, it is also possible to trade on the fluctuating prices of various commodities.

Infrastructure – Investment in roads, rail networks, energy and various other areas is required to ensure the efficient running of a country.

Derivatives – Financial instruments which are derived from an underlying asset or benchmark. Investors can use these to speculate on how a particular asset or market may perform.

Personal Assets

Of course, some investors prefer to stick with investments that they can see and understand, for example, art, antiques and fine wine.

Whilst these assets can appreciate in value, they do require a level of expertise from both the buyer and the seller to ensure that they represent a sound investment.

The value of such assets is always subjective, and investment in these areas is only recommended for those with a keen personal interest (and excellent insurance).

Benefits of Alternative Investments

While each alternative investment type has its own set of benefits and potential uses, they will typically serve the following purposes within a portfolio:

To provide greater diversification against the main asset classes. Alternative investments are often not correlated with other investment types and can help offset some of the risks associated with holding a more concentrated portfolio.
To seek higher growth potential and opportunities in niche areas.
In the case of some investments (for example, EIS and VCT contracts) to provide potential tax benefits.

Drawbacks

Of course, alternative investments do have some potential disadvantages:

Many alternative investments carry a higher level of risk than more mainstream investments.
The investments are often complex and may not be easily understood by a typical investor.
Some alternative investments, particularly those purchased outside the UK, may not be well-regulated. It is not always easy to spot the difference between a well-intentioned but unregulated investment and an outright scam.

Alternative Investments can be a useful addition to a diverse portfolio, provided you understand the risks and what you expect the investment to do for you. It is strongly recommended that you seek advice if you are considering purchasing an alternative investment.

Please don’t hesitate to contact a member of the team if you would like to find out more about your investment options.

The value of your investments can go down as well as up which would have an impact on the level of benefits available

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

EIS’s are high risk investment and you are unlikely to be protected if something goes wrong, do not invest unless you’re prepared to lose all the money you invest.

Please note that AIM listed shares are high risk and can fluctuate widely in value.

The content in this article was correct on 1st July 2025

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