Alternative Investments for International Portfolios

Most private investors hold portfolios that are, at their core, combinations of equities and bonds. This is understandable: equities and bonds are liquid, transparent, widely understood, and available through inexpensive passive vehicles. The conventional 60/40 portfolio has served many investors well over long periods.

But conventional portfolios have limitations. Equities and bonds are highly correlated during some types of market stress. Both can fall simultaneously when the primary risk driver is inflation or a change in interest rate expectations — as 2022 demonstrated. And there are whole categories of economic activity that generate attractive returns but are not represented in listed markets.

This is the case for alternative investments: assets beyond conventional listed equities and bonds.

What counts as an alternative

The category is broad and somewhat loosely defined. It typically includes:

• Infrastructure — toll roads, airports, utilities, renewable energy, water
• Private equity — ownership stakes in unlisted companies
• Private credit — lending to companies outside the bank and public bond markets
• Real estate debt — lending secured on property
• Specialist lending — consumer credit, trade receivables, SME lending
• Hedge funds — actively managed strategies using a wide range of techniques
• Commodities — physical gold, energy, agricultural commodities
• Farmland and timberland — physical land with agricultural or forestry production
• Litigation finance — funding legal claims in exchange for a share of any proceeds
• Aircraft leasing — financing commercial aircraft in exchange for lease income
• Renewable energy — direct investment in solar, wind, and other clean energy infrastructure

Each has different return characteristics, risk profiles, liquidity constraints, and access requirements.

Why alternatives add diversification

The most important feature of alternatives from a portfolio construction perspective is their low correlation with equities and bonds. This is a statement about how they behave differently during periods of market stress.

Infrastructure assets, for example, generate revenues that are typically regulated or contractually linked to inflation. When equity markets fall in a recession, the toll revenue on a motorway does not disappear. Farmland continues producing food. Renewable energy infrastructure continues generating electricity. These assets are not immune to value changes — financing conditions, energy prices, and regulatory environments all affect them — but their return drivers are fundamentally different from listed equities.

Private credit offers floating-rate income (tied to benchmark rates) secured on company assets. In a rising rate environment, private credit income increases; listed bonds fall. The correlation is low or negative.

The practical benefit: a portfolio that includes alternatives alongside equities and bonds can achieve the same long-term return target at lower overall volatility — or a higher return target at the same volatility.

Infrastructure

Infrastructure funds invest in physical infrastructure assets — regulated utilities, transport infrastructure, social infrastructure (hospitals, schools), and renewable energy facilities. Many infrastructure investments have revenues that are:

• Inflation-linked — regulated returns or contract escalations tied to CPI or RPI
• Long-duration — assets with operational lives of 20–50 years
• Quasi-monopolistic — users have limited alternatives to the utility or transport link

This makes infrastructure particularly attractive as an inflation hedge and as a source of stable, growing income.

Listed infrastructure funds (including investment trusts on the London Stock Exchange) provide access to this asset class with daily liquidity. Unlisted infrastructure funds have higher return potential but require longer holding periods (typically 7–12 years).

Private credit

Private credit has grown substantially since the 2008 financial crisis, as banks retreated from direct lending to mid-market companies due to regulatory capital requirements. Private credit funds now provide the financing that banks previously did.

The key features:

• Higher yields than investment-grade public bonds, reflecting illiquidity premium and credit complexity
• Floating rate coupons — most private credit loans are priced at a spread over a benchmark rate, providing natural protection against interest rate rises
• Security — typically secured lending against company assets, with covenants providing early warning of deterioration

Private credit is not without risk. Defaults occur; in a severe economic downturn, credit losses can be meaningful. Liquidity is limited — private credit funds typically require capital to be locked up for 4–8 years. But for investors who can accept this illiquidity, the risk-adjusted returns have compared favourably to public credit markets.

Real estate debt and specialist lending

Real estate debt funds lend money secured on commercial or residential property. Unlike direct property investment (which involves the complications of property management, development, and capital intensity), real estate debt provides fixed income with property as security.

Specialist lending funds invest in consumer receivables, trade finance, SME loans, or other financial assets. These tend to have high diversification (thousands of individual loans) and relatively short duration.

Renewable energy and farmland

Direct investment in renewable energy infrastructure (solar farms, wind energy) has become increasingly accessible through listed vehicles (investment trusts) and UCITS funds. The return profile — regulated or contracted revenues, long asset lives, inflation-linked — is similar to infrastructure generally.

Farmland and timberland are physical assets with returns driven by agricultural commodity prices, timber prices, and land appreciation. UK farmland has a long-term record of capital preservation and modest income. International farmland funds provide exposure across geographies.

Accessing alternatives: practical routes

Listed investment trusts (London Stock Exchange): Many infrastructure, renewable energy, private equity, and real estate debt strategies are available as listed investment trusts. These provide daily liquidity but may trade at a discount or premium to NAV.

UCITS funds: Some alternative strategies are structured as UCITS (Undertakings for Collective Investment in Transferable Securities), which can be held in offshore bonds, SIPPs, and other standard wrappers.

EIS (Enterprise Investment Scheme): For UK taxpayers, EIS investments in qualifying UK companies provide significant tax incentives (30% income tax relief, CGT deferral, loss relief). Only relevant if you retain UK income tax liability.

Private placements: For investors with larger portfolios and the appropriate professional investor classification, direct access to unlisted infrastructure and private credit funds is available, typically with minimum commitments of £250,000–£1,000,000.

How much to allocate

A reasonable rule of thumb for alternatives in a private portfolio:

• 10–15% for most investors seeking modest diversification without significant illiquidity
• Up to 20–25% for investors with longer time horizons and higher appetite for complexity
• Alternatives in illiquid vehicles should not represent more than the portion of the portfolio the investor does not need liquid access to

Suitability thresholds apply: many alternative fund structures are available only to certified sophisticated investors, high-net-worth individuals, or institutional investors. This is a regulatory constraint, not just a marketing convention.

Hedge funds: a brief assessment

Hedge funds deserve specific mention as a category that often creates as much confusion as clarity among private investors.

A hedge fund is an actively managed investment fund that uses a wide range of strategies — long/short equity, macro, arbitrage, managed futures, event-driven — with the aim of generating returns that are uncorrelated to broad markets. In principle, they offer genuine diversification. In practice, the experience of private investors has been mixed.

The core issue is cost. Hedge funds historically charged "2 and 20" — a 2% annual management fee plus 20% of profits. For these fees to be justified, the fund must generate significant alpha (returns above the market). Many do not — the dispersion between the best and worst hedge fund managers is enormous.

For private investors accessing hedge funds through fund-of-funds or retail UCITS hedge fund vehicles, an additional layer of fees is added. The fee drag is material.

The legitimate use cases for hedge funds in private portfolios:

• Access to strategies with genuinely low market correlation (market-neutral, systematic macro) as a volatility dampener
• Specialist credit and structured credit strategies not available elsewhere
• Selective allocation to managers with verifiable track records of true uncorrelated alpha

Avoid: funds that essentially deliver leveraged beta (market exposure through borrowed money), funds with opaque strategies that cannot be explained clearly, and funds where the fee structure consumes most of the gross return.

Private equity: realistic expectations

Private equity — investment in unlisted companies through structured funds — has delivered superior returns to public equity markets over long periods, according to most long-run data. This premium reflects the illiquidity (capital locked for 7–12 years), complexity, and manager skill involved.

Access for private investors has improved. UK investment trusts such as HarbourVest Global Private Equity, ICG Enterprise Trust, and Pantheon International invest in diversified portfolios of private equity funds and trade on the London Stock Exchange with daily liquidity (at a discount to NAV). This provides indirect access to private equity characteristics without the long lock-up of direct fund investment.

For investors with larger portfolios and the sophistication to understand commitment structures, direct allocation to private equity funds provides purer exposure. The minimum commitment is typically £250,000–£500,000 per fund; building a diversified private equity programme requires multiple fund commitments over several vintage years.

Realistic expectations: private equity outperforms public equity by approximately 2–4% per year on average after fees, over long periods. This is meaningful compounding over a decade. But it is not a guaranteed premium — manager selection matters significantly, and bottom-quartile private equity managers underperform public markets.

Frequently asked questions

Can I hold alternative investments in my SIPP or ISA? Some alternatives can be held in SIPPs and ISAs, and some cannot. Listed investment trusts (which include many infrastructure and private equity vehicles) can be held in both. Unlisted fund structures, EIS investments, and private placements cannot be held in ISAs but some can be held in SIPPs (with specific restrictions). Confirm the wrapper eligibility of any specific vehicle before investing.

How do I access alternatives if I do not meet the minimum investment thresholds? Listed investment trusts and UCITS alternative funds are the most accessible routes, with no minimum investment beyond what a brokerage account requires. For genuinely private alternatives (infrastructure funds, private credit funds, co-investments), most require professional investor status and minimum commitments. Building a portfolio large enough to access these directly typically requires several hundred thousand pounds in investable assets dedicated to alternatives.

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How Global Investments can help

We include alternatives alongside equities, bonds and real assets within client portfolios where appropriate, using both listed and unlisted vehicles. Contact us to discuss whether alternative investments are appropriate for your portfolio.

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This article is for general information only and does not constitute investment advice. Alternative investments often involve significant liquidity risk, complexity, and minimum investment requirements. Investments can fall as well as rise.