Alternatives is a broad term often used to describe types of investments that fall outside the standard asset classes of cash, bonds, shares and property. Alternatives include commodities, currency and derivatives.
Commodities (including gold)
These types of investments don’t pay interest or dividends, but do increase and decrease in value, which can result in a capital gain. The value of commodities often moves in the opposite direction of other asset classes (e.g. when share prices go down, gold often increases in value, and vice versa), so investors sometimes buy them to try to protect their money.
Currency (foreign exchange)
As well as being used to buy goods and services, foreign currency is also used as an investment. Currency investors are looking for higher interest rates overseas, or hoping exchange rates will move in their favour resulting in a capital gain. Investors, including managed funds, may also use currency to protect, or ‘hedge’, other investments that are invested overseas. The Financial Markets Authority has more information about forex trading.
Derivatives (including options and futures)
Derivatives are generally only used by more sophisticated investors, such as managed funds. This can be a confusing and complex area of investing. However, derivatives are built on a fairly simple concept - allowing people to protect themselves, or ‘hedge’, against future price movements. For example a farmer can fix the price today, for the milk they will supply in the future. While at the same time, a supermarket owner can fix the price now for the milk they will receive in the future.
Professional investors still use derivatives for this purpose, but can now also use them to invest more efficiently.
Other alternative investment types can include things such as private equity, hedge funds, fine wine, exotic cars and stamps. There are different reasons for buying each one, but, as with all investments, their value can go up or down.
Investing by lending our money on a peer-to-peer lending platform or participating in equity crowdfunding are other ways of investing and earning a return. Consumer has more information and peer-to-peer lending, as does the Financial Markets Authority (FMA).
Capital notes, perpetual subordinated notes and other hybrid securities have some features of both bonds and shares. They're often issued by well-known banks, but they are generally riskier and may not be suitable for many. Here’s more about capital notes from the FMA.