Who should read this page
JSP Hinters publishes introductory research on alternative investment markets. Those markets involve investments that are high risk, complex and, in many cases, difficult to buy or sell. This page sets out the main risks you should consider.
It is general information, not personal advice. It does not take account of your objectives, financial situation or needs, and it does not assess whether any investment is suitable for you.
Please read this page in full before acting on anything you read in our reports.
The value of your investment can fall
Investments do not always rise in value. Prices can fall, and they can fall by a large amount or, in some cases, to nothing at all. The value of your investment depends on the market it sits in, which means you may get back less than you put in.
Historic prices and historic returns are a poor guide to future results. An asset that has performed well in the past may perform badly in the future. “Historic performance” and “back-tested” figures are not a reliable indicator of future results.
No one, including us, can tell you when to buy or sell an alternative investment or what return you will achieve.
Non-readily realisable: you may not be able to sell
A non-readily realisable investment cannot easily be turned back into cash. In practice this can mean that:
- there is no open market and few or no buyers for the asset;
- a sale may take months or years to complete, if it completes at all;
- a seller may be forced to accept a lower price than they want;
- valuations may be provided infrequently, which makes pricing harder to verify; and
- you may be unable to access your money when you need it.
You should assume that an asset which is not readily realisable may never be sold, and plan on the basis that you may hold it to the end of its life.
Non-transferable: you may not be able to pass it on
A non-transferable investment cannot be sold or given to somebody else. You cannot normally pass it to a family member on death, and it may have to be held for the full term or dealt with in a way you did not anticipate.
Because such investments are designed to be held, the terms are often fixed for a long period. There may be no early exit, and any early exit may be heavily penalised or simply not permitted.
Illiquidity and non-transferability together mean that your capital may be locked in for the duration and unavailable for any other purpose.
Valuation risk
In markets without a continuous price, values are usually determined by reference to a valuation policy, a valuer or a dealer. Those values are estimates and they can be based on models, comparables or assumptions rather than on a real transaction at that price.
Valuations may be infrequent, may be revised downwards after the event, and may be produced by a party that is connected to the seller or the issuer. Two professionals may produce materially different values for the same asset on the same day.
A valuation is not a price you can necessarily achieve, and it should not be relied on as a reliable indicator of what you could sell for.
Complexity and understanding
Alternative investments often involve structures, fees, terms and legal documents that are difficult to read and hard to compare. The figures presented to you may be prepared on different bases, so two apparently similar investments may carry very different economics.
Returns may depend on assumptions about interest rates, exchange rates, default rates, occupancy, commodity prices or future valuations, which can change significantly over the life of the investment.
If you do not understand how an investment works, how it is valued, who you would be contracting with and what happens if things go wrong, you should not invest.
Counterparty risk
You may be dependent on a range of third parties, including the issuer, a manager, an administrator, a valuer, a dealer, a broker, a custodian or a bank. If any of them fails, becomes insolvent, ceases to trade or performs badly, your investment may lose value or your access to it may be lost.
Because alternative investments are often held in a single asset with a single provider, there may be little diversification at the provider level.
Check the identity of every party involved, the terms of your contract, and what protections or insurance, if any, actually apply.
Leverage risk
Where an investment is financed with borrowed money, or where the asset itself is geared, movements in value are magnified relative to your own capital. A small fall in the value of the asset can produce a much larger fall in the value of your investment, and a large fall can exceed your original outlay.
Interest costs may vary. Where rates rise, the amount you owe may rise faster than the income the asset generates, and you may have to meet payments you cannot afford.
Borrowing to invest in a high-risk, illiquid asset can turn a manageable loss into an unrecoverable one.
Concentration risk
A single asset, a single sector or a single provider may represent a large share of your net worth. If that one investment performs badly, your overall position may suffer severely even if your other assets are performing well.
Illiquid and non-transferable assets can be difficult to rebalance. Even if the rest of your portfolio performs well, you may be unable to sell the concentrated asset to restore balance.
Consider carefully how much of your net worth a single asset represents, and how it interacts with the rest of your portfolio and your liabilities.
Market and liquidity risk
Demand for a given asset may rise or fall sharply, and there may be very few transactions. Prices quoted in thin markets may not reflect what you could actually achieve. A market that appears active can still become effectively closed, and in some circumstances an asset cannot be sold at all.
Alternative markets are often unregulated or only lightly regulated, which means there is generally no regulator to step in if trading stops, a provider fails or a price becomes misleading.
Market conditions can change quickly, and liquidity can disappear precisely when you most need to sell.
Currency risk
If an investment is denominated in a currency other than your own, the value you receive in your currency depends on exchange rates. Currency movements can add to, or subtract from, the return on the underlying asset, sometimes very significantly.
Where exchange rates move against you, a stable underlying asset can still produce a loss in your own currency.
Custody and settlement risk
Your investment may be held by a third-party custodian or administrator. Administrative errors, delays in settling transactions, disputes over ownership and losses in transit or custody are all possible.
Documentation may be held in one jurisdiction while the asset sits in another, and enforcing your rights may be slow and expensive if a dispute arises across borders.
Check whether title is registered in your name, where records are held and which party is responsible for reconciling them.
Operational and political risk
Changes in law, taxation, regulation or government policy can affect an investment, sometimes retrospectively. Events outside the control of the issuer or manager — including war, terrorism, pandemic, sanctions, expropriation or infrastructure failure — can interrupt production, transport or sale of the asset.
Cybercrime, fraud, systems failure and human error can affect assets and records even where operators are competent.
Insurance may be limited, may not cover the specific risk you face, and may exclude you entirely.
Tax considerations
Tax treatment depends on your individual circumstances, the structure of the investment, your residency and the rules in force at the time. It can be complex, and the rules may change after you invest.
We do not provide tax advice. Please take your own professional advice on the tax consequences of any investment before you commit capital.
No FCA regulation and no compensation protection
JSP Hinters is a trading style of Impact Marketing Network Ltd. The introductory marketing services we provide are not regulated by the Financial Conduct Authority. JSP Hinters is not authorised or regulated by the FCA, and we are not a registered financial adviser.
Because our services are not regulated:
- the protections that apply to investments sold by FCA-authorised firms do not apply to you;
- you will not have access to the Financial Ombudsman Service if you have a complaint about our services;
- you will not have access to the Financial Services Compensation Scheme, so losses would not be compensated under that scheme;
- you do not benefit from the client-money or client-asset protections that regulated firms must maintain; and
- you must make your own assessment of the investment, the provider and the terms.
Please read our Terms & Conditions and Privacy Policy for further information about how we operate.
Seek independent advice
If you are considering whether to invest in any market or instrument described in our reports, we strongly recommend that you take independent professional advice from a firm authorised by the FCA, and that you consider your own financial circumstances, goals and risk tolerance first.
Nothing in our reports is a recommendation, an offer or a solicitation to buy or sell any investment. Our role is to help you understand how a market works, not to tell you what to buy.