Lessons to be learned after 15 years of investing in alternative investments/funds…………

It is over 15 years since interest rates were cut to record lows. This, coupled with underperformance of investment and pension funds, fuelled the desire for many to look at alternative ways to invest their money. Being the ‘The Gateway’ to huge underperforming, often dormant pension funds, The Self Invested Personal Pension (SIPP) sector, was a major benefactor of this shift. The sector grew rapidly from one that generally served the business owner, who understood the benefits (and probably the risks) of owning commercial property within their pension, to serving the general public, to hold alternative (mainly property and land) investments within their pensions. With huge, often underperforming, pension funds to target, the alternative investment sector, generally offering 8 – 12% annual returns, experienced substantial growth.

Sadly, the vast majority of these investments/funds have fallen well short of delivering on promises, with only a small number delivering on the promises made to the investor. Reasons for this range from; outright fraud to overestimating financial projections and underestimating challenges in delivering the desired outcome. To be fair, some have fallen foul of unforeseen political and/or tourism changes, where the orchestrators have not intended to lose investor’s money. However, others have been constructed using convoluted, engineered business models, designed to attract investor funds into a company/structure, where the investor has little control, nor assets to secure their investment, often resulting in extreme, or even total loss.

The ‘money-go-round’: Product provider offers high investment returns to attract investors. These projects are rarely entertained by mainstream funders (such as banks), due to inherent risks and/or lack of track record. The projects tend to progress, possibly paying investor returns for one-three years generally, however returns reduce or cease altogether, sometimes in conjunction with new investment becoming harder to obtain. With reduced, or non-existent returns, the products (and/or products within the fund wrapper) generally can’t be re-sold, or if they are re-sold, this is at a dramatically reduced price, resulting in substantial loss. In certain cases, this can present an opportunity to the original product provider, who is keen to ‘buy-back’ the investment at a substantially reduced price.

More concerning is that people have been encouraged to invest in such high-risk products, by raising money on their residential properties. In extreme cases, people in their late seventies/early eighties have been talked into raising funds, even utilising ‘equity release mortgages’ to do so. It is one thing risking money that you can afford to lose or having part of your pension invested, however it is another being encouraged to borrow money, to invest.

Further consideration is that direct cash investment into alternative (land and property) investments is an unregulated activity, therefore protection against financial losses is generally not catered for. Fortunately, those who took financial advice from a regulated UK financial/mortgage adviser to access such investments via a SIPP, an interest only mortgage or secured loan, may result in being compensated for financial losses, providing a case for unsuitable advice can be presented. Unfortunately, for cash investors that didn’t receive advice from a UK financial adviser, the financial outcome tends to rely on the performance of the alternative investment(s).

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