Four Niche Investments That Are Still Offering Headline-Grabbing Returns

Four Niche Investments That Are Still Offering Headline-Grabbing Returns
Theodora Lee Joseph, CFA

over 1 year ago4 mins

  • Traditional assets have disappointed lately, but you can still make healthy returns in lesser-known alternative asset classes.

  • These alternative assets have payouts that resemble those of traditional ones: music royalties resemble annuities, carbon credits resemble commodities, wine resembles real estate, and litigation finance resemble options.

  • But remember, you’ll still want a diversified portfolio if you choose to invest in these categories.

Traditional assets have disappointed lately, but you can still make healthy returns in lesser-known alternative asset classes.

These alternative assets have payouts that resemble those of traditional ones: music royalties resemble annuities, carbon credits resemble commodities, wine resembles real estate, and litigation finance resemble options.

But remember, you’ll still want a diversified portfolio if you choose to invest in these categories.

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With stocks and bonds left black and blue by inflation this year, investors have increasingly been crowding around everything from private equity to real estate. But some alternative asset classes have managed to keep a much lower profile, all while delivering the sorts of gains you’d be more than happy to see right now. So let’s take a closer look at those investments and how you can buy into them.

Music royalties

You’re probably already familiar with music royalties: they’re how people in the music industry get paid, generated based on the types of copyrights involved in the making of a song. The most common are streaming royalties, which get paid out every time you listen to a song on a platform like Spotify or Apple Music.

It’s a good time to invest in music because digital streaming has taken off in the past decade, which has made music more lucrative again. And since music spending isn’t particularly correlated with consumer incomes, royalties tend to be insulated from recessionary or inflationary risks.

You can invest in listed song funds like Hipgnosis Songs Fund (SONG) to tap into those royalty streams and the long-term income they provide, or pick and choose your own music catalog through platforms like ANote Music or Royalty Exchange. Just be aware that your stream of income will be highest in the first few years, then gradually settle at a stable, lower level – much like annuities.

Hypothetical income for a song

Carbon credits

If you think companies need to drastically cut their environmental footprint, carbon credits let you put your money where your mouth is. A carbon credit gives a company the right to emit one ton of carbon dioxide or equivalent. They get a set number of credits which they use up over time, and they have to buy more credits (or face a huge fine) if they emit more carbon than their credits allow.

Europe currently has the biggest carbon credit market, with the EU Emissions Trading System determining the carbon price based on the supply and demand of credits. Legislation automatically reduces the supply of credits each year, which means that the price of carbon credits behaves like that of commodities. And while the carbon market can be impacted by external economic factors, it doesn’t bear much correlation with capital markets, making it a good diversification tool.

The easiest way to start investing in carbon credits is through ETFs, like the KraneShares Global Carbon Strategy ETF (KRBN, expense ratio: 0.79%), SparkChange Physical Carbon EUA ETC (CO2, 0.89%), or WisdomTree Carbon (CARP, 0.35%).

Wine

Your favorite Merlot is more than just a pleasant way to spend a Friday evening: it can be a great investment too.

If you’re investing in wine, it’s because you believe your bottle of wine will be worth more five years-plus down the road – a bit like investing in real estate. But just like real estate, it can pay off in a big way, especially because higher demand and limited supply of fine wine have helped shore up returns in the last couple of decades. Just look at the Liv-ex 1000 industry benchmark: the index – which tracks 1000 of the most traded wines across the world – has seen its value rise by 26% in the last year alone, beating the S&P 500 by almost 40%.

Liv-ex Fine Wine 1000 index

Fine wine prices have historically been less volatile than stocks, meaning it serves as a good hedge in times of inflation. It also helps that wine is exempt from capital gains tax in some regions. And you don’t need your own wine cellar to invest: platforms like Vint, Vinovest, and Cult Wine Investment all offer dedicated funds.

Litigation finance

This one’s the most niche of them all: you could always choose to fund lawsuits as a third party in a process known as litigation finance. This means you’re improving access to the legal system for those without strong financial resources, while potentially making a tidy return.

You’d provide capital to the plaintiff involved in litigation in exchange for a proportion of any settlement or payout. The outcome from your investment is binary, much like options investing: if the plaintiff loses the lawsuit, you lose your contribution. But if the plaintiff wins, you earn a proportion of the claim, which will be substantially larger on average than the cost of the lawsuit:

Funding vs. claim amount in a typical case

Diversification is important in litigation finance, and it’s worth having a portfolio of several cases at a given time. But results from lawsuits generally aren’t correlated to capital markets, which can help reduce your overall portfolio volatility. And since lawsuits are usually resolved in a year or two, your capital isn’t locked up as long as it might be with wine, say.

To get started, you could invest in listed companies that specialize in financing litigation, like Burford Capital, or you could build your own portfolio through litigation funding platforms like Axia Funder or LexShares.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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