This form of specialist investing is not for those without the ability to take on a bit of risk, but putting your money in niche areas of the market can be both lucrative and interesting if done properly.
The most popular alternative investments tend to be wine, art, and gold.
Adrian Lowcock (pictured), senior investment manager at Hargreaves Lansdown, says the investments can add a kick to your portfolio, but they are extremely specialised and should not be part of any investor's core holdings.
Gold
Throughout the years, investors have used gold as a hedge against risk in other asset classes. Lowcock says there are two primary ways to gain access to the precious metal – through physical gold, or bullion, and through gold shares, or equity in gold and gold mining companies.
However, Lowcock points out there is a wide disparity between the price of gold and the performance of gold shares, with the latter lagging the performance of the physical metal.
He says this disparity is not likely to close naturally, but companies are taking measures to achieve this aim.
However, he says before investors put their money in gold, they need to ask themselves why they want exposure to the precious metal.
Lowcock says if you expect the gold price to go up, you are better off with bullion. He adds the best way to gain access to physical gold is through an ETF – such as the five crown-rated ETFS Gold Bullion.
Over the last five years, the fund has made 124.48 per cent, successfully tracking the gold price, while the Global ETF Commodity & Energy sector has picked up 21.46 per cent.
Performance of ETF vs sector over 5yrs
Source: FE Analytics
The ETF gained traction in the depths of the financial crisis, when investors turned to gold to hedge against the risk of sharply falling markets.
Lowcock adds that ETFs are a safer play because they do not take on company-specific risk such as the cost of management and mining.
However, he says that if you expect the disparity between the gold spot price and gold shares to narrow, you should select a fund that invests in gold equities.
He recommends the four crown-rated Smith & Williamson Global Gold and Resources and BlackRock Gold & General funds for investors looking to access gold shares.
"The funds could provide a bit of spice to your portfolio," he said.
Both have been standout performers over the long-term, although the Smith & Williamson portfolio has outperformed over five years, returning 26.96 per cent, while the BlackRock fund is up 7.96 per cent.
Both suffered in the rising markets of 2012, losing roughly 20 per cent each.
Wine
When it comes to investing in wine, Lowcock says the key ingredient is knowledge of the sector.
"You need to speak to a specialist in wine because it’s very niche and very specialised," he said.
"You can’t go to your IFA because they won’t know about the wine market. It’s a different skill-set from fund management."
Lowcock says any investor looking to try their hand at wine investing needs to do their research because it is only worth what the market is willing to pay for it.
"There is no return on capital employed. The bottle of wine doesn’t earn you an income, can’t grow its client base or multiply – that would be a neat trick – so all you are basing the investment on is that someone else will be willing to pay more for the same bottle of wine in the future," he said.
Lowcock warns that while someone with a strong knowledge of the market could make money investing in wine, it is definitely a medium- to long-term investment and is made more difficult by the fact that it is hard to demonstrate a return.
"The value will only come through over time," he added.
He says that wider access to the internet is making it easier to value wine and that funds specialised in this area are also available.
"Don’t treat them as core holdings, but rather as indulging in a hobby you really like," he advised.
Art
Investing in art has often been the pastime of the rich and famous, adorning West End office walls and celebrity mansions, but Lowcock says anyone with an interest in this area has the potential to make money from it.
He says the difficulty lies in the fact that there is no clear exchange market for art, which makes it extremely hard to put a value on.
"It’s all about what the market wants at the time, what’s in fashion," he said.
"Art is very subjective. What is a Picasso worth compared with any other artist?"
"If you are interested in art itself, buy it to appreciate it and you may benefit from an attached value to it. But in my experience, you’ll get as much out of being able to look at it."
FE Trustnet wants to know what off-the-wall investments you own. Leave a comment below or send us an email to tell us some of the niche holdings you have picked up over the years.