Rock-bottom yields from government bonds and destabilising bouts of stock market volatility have pushed sophisticated investors, in the quest for higher returns, to invest ever more money with alternative investment products. This has opened up the market, creating demand and in turn more investment opportunities. One type of alternative investment opportunity is asset-based lending. This type of lending is generally structured to help investors avoid the stock market roller coaster, while targeting lower principal risk and higher returns. These types of opportunities are typically secured by what is termed ‘tangible collateral’, such as properties, machinery, land or other contracted income streams. These can provide extra protection for portfolios in times of stock market volatility.

With an asset-based investment, the investor is making their investment based on the valuation of some asset that the borrower has. That asset acts as collateral. For example, if a company has bought a new piece of equipment at the cost of £500,000, land valued at £5 million or an income stream from a tax rebate, it can borrow from a number of private investors against that asset. The investing instrument created by this agreement, whether it’s a bond or some other form of financing agreement, usually termed a ‘debenture’, is backed by that collateral. So, in a worse-case scenario, the asset would be sold to repay the principal. In the case of land or property, a charge on a property, known as a mortgage, may act as the collateral, in the case of litigation finance or tax rebate, it will be a first lien position on the future proceeds or for a corporate loan a floating charge over that company’s business & assets. This idea of collateral, which is the asset backing the loan, is radically different from the stock market, where the investment is not protected from loss. Investors who put money in asset-based opportunities may sleep soundly, knowing that their investment has some form of protection against losing their original investment.

As stock markets rise and fall, indexes like the FTSE100, the Dow and the S&P, track the worth of investments. That’s great when the market is up, but what about when it’s down? To counter act the loss investors have to ‘’short the market’’ i.e. bet against the market. This takes knowledge, timing and dare I say it, the ‘x’ factor, a bit of ‘’luck’’. Investors who can’t or won’t do this have to rely solely on their investment manager. How many times have you heard them say;’ the markets a bit off today’’ or ‘’ the market’s down a bit but it’ll bounce back’’ (who knows when!). There is none of that with alternative asset-backed investments.

Alternative asset-backed investments have completely different volatility patterns from the stock market, or, in some cases, are completely disconnected from it. For example, an investment in real estate in Manchester, Birmingham or Liverpool may not fluctuate as much as London That’s because a row of houses in Birmingham or Liverpool or Manchester has value related to its local property markets and what is happening in that market, such as a new infrastructure projects i.e. HS2. Whereas the value of a London building is part of a historic and cultural skyline and influenced by the global markets and global investors. Litigation finance, corporate loan finance and even film funding, on the other hand, will perform regardless of whether the stock market is up or down. That is, with litigation funding, as long as there are plaintiffs seeking funding, there will be pre-settlement funding companies, and litigation portfolios to invest in. Alternative investments like lawsuit loans and real estate are a way for investors to diversify outside of the stock market for a potentially more stable and consistent income streams.

These investments are also a great way to diversify a portfolio by evening out performance with different types of alternative assets. Any investor knows portfolio theory states that the primary way to minimize risk is by building a portfolio of assets that are not correlated. So, when investment A is underperforming, investment B will be performing well, and investment C will be on course. You get the idea. The key is that no one investment may influence the rest of the portfolio.

This very nature of asset-backed investments is what makes them so appealing in diversify between asset types, geographies, durations and returns. For example, the performance of a real estate opportunity may depend on the composition ranging from commercial, residential, mixed use or hotels, its location north vs south, and the loan to value ratio. Investors can balance their overall investment portfolio between differently performing properties investment opportunities to fill performance gaps or to lessen the risk. Investors can also choose from a range of non-real estate asset- backed investments, such as corporate loans, litigation funding or even film funding, with the returns backed by the UK Government, to give a fuller diversification to their portfolio. Remember, more diversity, less risk.

What type of returns, I hear you ask. Well, there is a range of returns available. As a guide it’s not uncommon to receive between 8% to 12% annually, fixed, for a term of between 2 to 5 years. Westway Property Bond is currently paying 10% annually on a 5 year fixed term, Asset Life Debenture are at 8.75% fixed for 2 to 5 years and Certain Bridge Secured Fixed Interest is currently offers 10% per annum. Some other real estate investment products, such as short term SPI’s from Signature Capital offer 12% over a 12 month period, with investments being used to fund their hotel refurbishment programme.

Because of the demand for good returns secured against assets there are now many more products on the market. Alternative asset backed investments are no longer the preserve of the very rich, with minimum investments starting from as low as £5,000 for a property backed debenture to £15,000 for SPIs, so these products are now within reach of nearly all investors. However, the average minimum investment is usually between £10,000 to £15,000. A good portal to visit is www.aurum-wealth.com that list a number of alternative asset backed investment opportunities.