Alternative investments for small investors: beyond shares and funds

The development of digital platforms has made it possible to take part in markets that were traditionally reserved for large fortunes or institutional investors.

The private credit, crowdlending, certain real estate projects, commodities or digital assets are some examples.

This greater accessibility also demands a greater capacity for analysis.

An alternative investment is not necessarily better than a traditional investment and, in many cases, it carries additional risks related to liquidity, concentration or the difficulty of valuing the asset.

The Comisión Nacional del Mercado de Valores (CNMV) points out that, before investing, it is necessary to understand the characteristics and risks of the product, paying particular attention to factors such as return, risk, costs and liquidity.

That is why the question is not whether to replace equities and funds with alternative investments, but rather to understand what they can bring to a portfolio and what risks they involve.

What are alternative investments?

The concept of alternative investment covers a wide variety of assets and strategies that lie outside traditional investments in shares, listed bonds and conventional funds.

The main options may include:

• Private debt or private credit.
• Crowdlending and P2P lending.
• Real estate investment.
• Venture capital.
• Commodities such as gold.
• Crypto-assets.
• Art, collectibles and other physical assets.

Each one behaves differently and, therefore, they should not be analysed as if they were a single category.

The main characteristic they share is that they can provide sources of return and risk that differ from those of traditional financial markets.

Why might they be of interest to small investors?

The main reason for including alternative investments should not simply be to seek a higher return.

Their usefulness may lie in diversifying the sources of risk and return of a portfolio.

For example, an investor who concentrates practically all of their wealth in shares is highly exposed to the performance of stock markets, and adding other assets may reduce that dependence, although it also introduces new risks.

In addition, some alternative investments provide direct access to certain sectors of the real economy.

This is the case with private credit, where investors' capital can finance specific companies or projects instead of being traded on public markets.

Let us look at them one by one:

1. Crowdlending and P2P lending

The crowdlending allows a group of investors to finance loans granted to companies or individuals through a digital platform.

The investor lends a certain amount and receives interest in accordance with the terms of the loan, while the borrower obtains financing.

For a small investor, one of the main advantages of the model is the ability to spread relatively small amounts across different deals; however, there is also credit risk: if a borrower defaults on their obligations, the investor may suffer a partial or total loss of capital.

For this reason, crowdlending should not be analysed solely on the basis of the target interest rate. It is also necessary to examine the borrower, the term, the collateral where it exists, diversification

and liquidity.

What does a platform like Maclear offer?

Platforms such as Maclear make it easier for private investors to access business loans and allow capital to be spread across different deals.

Maclear carries out due diligence processes before publishing certain projects and assigns an internal risk score to deals; these tools are designed to help assess and manage risk, but they do not eliminate it.

The platform also features Autoinvest, which allows investments to be automated according to the criteria configured by the user.

Another feature is the Secondary Market, which allows certain positions to be offered to other investors before maturity. This function may increase the chances of liquidity, but a listed position will not necessarily find a buyer.

Maclear AG operates under the Swiss financial framework and is a member of PolyReg SRO, a self-regulatory organisation supervised by FINMA.

2. Property investment

The property sector is another of the best-known alternatives.

Buying a home, a commercial unit or a property to let directly normally requires a large amount of capital, as well as taking on acquisition, maintenance, financing and management costs.

Digital platforms have created other ways of taking part in property projects with smaller amounts.

Depending on the model, the investor may finance a project through debt or acquire a stake in a company's equity.

The main advantage is being able to access the property sector without having to buy and manage an entire building. The trade-off is that these projects may also carry market, execution, financing and liquidity risk.

3. Venture capital and unlisted companies

Another alternative is investing in companies that are not yet listed on the stock exchange.

Venture capital and certain equity crowdfunding platforms make it possible to take part in companies at different stages of development.

The possibility of obtaining a high return exists, but so does the risk that the company will not meet its objectives or even lose all of its value.

In addition, investments in unlisted companies may remain illiquid for long periods.

They should therefore be considered investments with greater uncertainty and a potentially long time horizon.

4. Gold and other commodities

Gold is often used as a diversification asset and, in certain portfolios, as a defensive element against particular economic scenarios.

A private investor can gain exposure to gold through different vehicles, from physical gold to financial products that track its performance.

However, gold does not generate interest or dividends; its return depends mainly on the movement of its price.

The same applies to other commodities: they can help to diversify a portfolio, but their prices may undergo significant movements owing to economic, geopolitical and supply-and-demand factors.

5. Crypto-assets

Cryptocurrencies and other crypto-assets represent one of the most accessible alternative investments for private individuals.

Their main appeal relates to their growth potential and to the emergence of new technologies and financial models.

But they are also particularly volatile assets. Their price may vary considerably over very short periods, and there are additional risks relating to technology, custody, platforms and regulation.

For this reason, if they are added to a portfolio, their weighting should be in line with the risk the investor is willing to take on.

The CNMV recommends being wary of investments that promise high returns with no risk, and points out how important it is to check the information and understand the product before investing.

6. Art, collectibles and other physical assets

Art, watches, classic cars, wine or certain collectors' items may also be considered alternative investments.

In these cases, value depends largely on the specific supply and demand of each market.

Their main drawback for a small investor is that they can be difficult to value and to sell; in addition, there are costs for conservation, insurance, intermediation and storage.

For this reason, they should not be confused with liquid assets that can be bought or sold easily.

How do alternative investments fit into a portfolio?

An alternative investment should not be added simply because it has produced good results recently.

The first question should be: what role do I want it to play within my portfolio?

It may serve to:

• Diversify away from equities.
• Add exposure to private credit.
• Generate income through interest.
• Gain access to the property market.
• Add exposure to commodities.
• Take part in unlisted companies.
• Diversify against certain risks of traditional markets.

Once the role has been defined, you need to determine what percentage of your assets it makes sense to allocate.

There is no universal percentage; for some investors alternatives may represent a small, complementary part of the portfolio; for others, a larger proportion may make sense if they fully understand the risks and have sufficient liquidity outside these investments.

Diversifying does not mean accumulating products

Holding five different investments does not necessarily mean being well diversified.

If they all depend on the same economic factor, the risk may still be highly concentrated.

For example, combining several property investments does not remove exposure to the property sector. Likewise, investing in different loans to companies in the same sector or country may maintain a high concentration.

A diversified portfolio should seek exposure to different risk factors, not simply accumulate products with different names.

What should a small investor look at before investing?

Before adding an alternative investment, it is worth answering at least these questions:

Do I understand how it works?

If you cannot explain where the returns come from, you probably do not yet understand the investment well enough.

When will I get my money back?

Liquidity is especially important in alternative investments; some can be sold easily and others require waiting until maturity.

What happens if things go wrong?

You need to know the loss scenarios and what mechanisms exist to manage certain incidents.

What costs are involved?

Fees can significantly reduce the final return.

Is the platform or entity regulated?

When the investment is made through a platform, it is worth checking who operates it, under what regulatory framework and what information it provides.

In the case of crowdfunding services regulated under the European framework, ESMA points out that there are specific protection requirements for retail investors, including knowledge assessments and simulations of the ability to bear losses for certain non-sophisticated investors.

Conclusion

Alternative investments offer small investors possibilities that were far less accessible years ago.

Crowdlending, property investment, venture capital, commodities, crypto-assets and other assets can complement a traditional portfolio made up of shares, bonds and funds.

But diversifying does not mean investing in just any different asset.

Each alternative has its own risks, especially in terms of liquidity, volatility, credit, valuation and the possibility of capital loss.

Within this universe, crowdlending may be of interest to those looking to add private credit to their portfolio through loans to businesses. Platforms such as Maclear facilitate access to this asset class through diversification tools, deal analysis, Autoinvest and a Secondary Market subject to the availability of buyers.

The key for the small investor is not to find one alternative investment that replaces all the others, but to build a portfolio in which each asset has a specific role and the overall risk is consistent with their objectives and time horizon.

The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. Peer-to-peer (P2P) lending and crowdlending investments carry a risk of partial or total loss of capital. Past performance does not predict future results. Liquidity on a secondary market is not guaranteed. Readers are encouraged to conduct their own research and consult qualified advisors before making any financial decisions. The availability of products and services may be restricted in certain jurisdictions.