An alternative investment is defined as an investment that is not one of the three traditional asset types — stocks, bonds or cash. As such, these investments are typically complex in nature, sometimes unregulated, and lack liquidity.
So why would an investor wish to expand his portfolio to include an unconventional asset class?
With volatile stock markets and rock-bottom bond rates around the world, the lucrative returns and diversification achieved on peer-to-peer (P2P) lending platforms globally are reminding investors of the benefit of increasing ones’ exposure to this type of alternative investment.
Traditionally, the term alternative investment broadly includes some financial assets, such as real estate funds and commodities, carbon credits, or film production, as well as more tangible assets such as precious metals, art, wine, antiques, coins, or stamps.
High-net-worth individuals (HNI) are typically advised to place 10-15 per cent of their financial assets in them to reduce overall risk through diversification, because their returns have a low correlation with those of standard asset classes.
While these investments are not a panacea for all market conditions, they do help portfolios to achieve lower volatility during turbulent times; in turn helping investors to avoid the behavioural urge to sell at market bottoms.
Some investors ask their investment managers to add alternative investments to their portfolio because it is an investment that they wouldn’t find on their own. Often they are costly to find, with little information available.
But today P2P finance platforms are providing everyday investors with the opportunity to gain exposure to a diversified, high-return, alternative asset class, which is readily available, easy to access, and low maintenance.
Using the innovative technology of crowdfunding, P2P platforms directly connect investors with small and medium-sized enterprises (SMEs) to create mutually beneficially partnerships for growth.
Investors are able to diversify their portfolios, receive higher targeted returns, and contribute to the growth of SMEs and wider economy. And the businesses on the platform gain access to cheaper, faster and more flexible finance than conventional sources.
Since late 2014, Beehive has channelled more than Dh18 million ($5 million) in finance to more than 40 SMEs in the UAE, helping them to invest in new technologies, hire more staff and expand to different markets.
Unlike many other alternative investments, P2P lending isn’t limited to HNIs. Individual investors can join Beehive by setting up an account with little as Dh1,000, and can invest from as little as Dh100 into each business listed on the platform.
A real-time dashboard provides investors with visibility on their investments and available funds, including monthly repayments, and average returns are circa 12 per cent APR (annual percentage rate).
This is noticeably higher than the average net annual returns since 2009 for investors who lent money through Lending Club and Prosper Marketplace, two of the largest P2P lending platforms for consumers in the US.
Returns on these platforms have ranged from 5 per cent for their most creditworthy borrowers to 9 per cent for sub-prime borrowers.
But with every good investment comes risks, and this can be especially true for unconventional investments. With P2P finance, there is a possibility that loans could go into default.
Even though each sum is split up among many investors, if a company in unable to pay the amount back, it could leave some investors at a loss.
P2P platforms are managing this risk by carefully selecting the businesses they list on their platforms through rigorous risk assessment. Beehive’s extensive proprietary risk model involves examining a company’s management team, relevant sector expertise and performance to date.
Not only is their financial strength and payment history reviewed, but the company’s commitment and industry benchmark is examined closely, with verification from external parties such as business services agencies and their stakeholders via social media platforms.
In addition, P2P platforms provide investors with a level of diversification due to the variety of businesses being listed.
It is important to examine the people behind the business, and fully understand their ambitions and motivations.
Do they have personal ties to the region or are they likely to flee if things don’t work out with their business? Wadih Haddad, a business owner who secured finance on Beehive earlier this year, was so impressed with the thoroughness of the assessments carried out on his business that it gave him complete confidence to invest in other businesses on the platform personally.
In today’s world, it is difficult to find a decent return on your money. P2P finance gives people the opportunity to get direct exposure to the burgeoning SME market, with no middleman and no costly asset management fees.
It is giving investors the opportunity to gain exposure to fast-growing, businesses with plenty of opportunity for growth, as part of a sensible, balanced and diversified investment portfolio.
The writer is the founder and CEO of Beehive, the online peer-to-peer finance platform.
