Beyond the familiar territory of equity and bond funds, a range of "alternative" assets — gold, broader commodities, property, infrastructure and absolute return strategies — are sometimes suggested as further diversifiers for a portfolio. They are often discussed with more enthusiasm during periods of market stress or high inflation than at other times, which is itself worth noticing. Understanding what these assets can and cannot realistically be expected to do is more useful than either dismissing them outright or treating them as a guaranteed portfolio improvement.
Why alternatives are considered at all
The appeal of gold, commodities and other alternative assets rests mainly on the idea of low or negative correlation with mainstream equities and bonds — the hope that when shares and bonds fall, these assets might hold steady or rise, smoothing the overall portfolio's path. This is broadly the same logic that underpins combining equities and bonds in the first place, extended to a further set of assets with different underlying drivers.
Gold
Gold has a long history as a store of value and is often discussed as a hedge against inflation, currency weakness, and periods of acute market or geopolitical stress.
What gold can plausibly offer
- Historically low or inconsistent correlation with equities over some periods, which can provide diversification, particularly during specific types of market stress.
- No dependence on a company's earnings, dividends or management decisions, since gold itself generates no income or yield.
What gold does not offer
- It produces no income, dividend or interest — any return depends entirely on its price changing.
- Its price can be volatile over shorter periods, and its long-term real return (after inflation) has historically been more modest than equities over most extended periods.
- Its correlation with equities is not fixed or guaranteed — there have been periods where gold and equities have moved in the same direction.
UK investors typically access gold through funds tracking the gold price (often via gold-backed exchange-traded commodities) rather than holding physical gold directly, which avoids storage and insurance concerns but introduces its own fund structure and cost considerations to check.
Broader commodities
Commodity funds typically track a broad basket of raw materials — energy, industrial metals, agricultural products — rather than gold specifically. Commodities are sometimes discussed as an inflation hedge, since rising commodity prices are often a direct component of measured inflation.
Considerations specific to commodities
- Commodity prices can be highly volatile and are influenced by supply and demand factors specific to each commodity, geopolitical events, and currency movements, making them harder to analyse using traditional company-focused research.
- Broad commodity funds often use futures contracts to gain exposure rather than holding the physical commodities, which introduces additional structural considerations affecting returns compared with simply tracking a spot price.
- Like gold, commodities generate no income themselves.
Property and infrastructure funds
Property and infrastructure funds offer a different kind of diversification, since they are backed by physical, income-generating assets — commercial buildings, or infrastructure projects such as toll roads and utilities — with returns driven partly by rental or usage income and partly by asset value changes.
A note on liquidity
Some open-ended physical property funds have, in the past, faced difficulties allowing investors to withdraw money quickly during periods of market stress, since the underlying buildings cannot be sold as quickly as shares can. This liquidity mismatch between a fund offering daily dealing and underlying assets that trade far less frequently is an important structural point to understand before investing, and has led some funds to introduce longer notice periods for withdrawals.
Absolute return and multi-strategy funds
These funds aim to deliver a positive return in most market conditions, regardless of the direction of broader equity and bond markets, using a range of strategies. In practice, performance has varied considerably between funds and over time, and higher fees are common given the more complex strategies involved. Their track record as a category has been mixed, and the complexity of their strategies can make them harder for an ordinary investor to properly understand and evaluate compared with a straightforward equity or bond fund.
| Asset type | Main diversification argument | Key limitation |
|---|---|---|
| Gold | Low/inconsistent correlation with equities; inflation and stress hedge | No income; correlation not guaranteed; volatile short-term |
| Broad commodities | Direct link to certain measures of inflation | High volatility; futures-based structures add complexity |
| Property/infrastructure | Income-generating physical assets, different return drivers | Potential liquidity mismatch in open-ended fund structures |
| Absolute return | Aims for positive returns regardless of market direction | Mixed track record; higher fees; complex to evaluate |
How much, if any, is typically discussed
Where alternative assets are used at all, they are generally discussed as a smaller satellite allocation — commonly cited ranges are in the low single digits to perhaps 10–15% of a total portfolio — rather than a core building block, given their less predictable behaviour and, in several cases, lack of any income return. This keeps their potential diversification benefit available without allowing a single asset with more volatile or uncertain characteristics to dominate portfolio outcomes.
Costs and access
Alternative asset funds, particularly commodity and absolute return funds, often carry higher ongoing charges than mainstream equity or bond trackers, reflecting the more specialised nature of managing exposure to these asset types. As with any fund, this cost needs to be weighed against the specific diversification benefit expected.
How UK investors typically access these assets through funds
Gold and precious metals
UK investors most commonly gain gold exposure through exchange-traded commodities backed by physical gold held in vaults, or through funds investing in gold mining companies, which behave somewhat differently from the gold price itself, since mining company shares are also affected by company-specific factors such as production costs and management decisions, in addition to the underlying gold price.
Commodities
Broad commodity exposure is generally accessed through index-tracking funds following a commodities index covering a basket of energy, metals and agricultural commodities, typically achieved through futures contracts rather than direct physical ownership of the underlying commodities, which would be impractical for most raw materials.
Property and infrastructure
Beyond open-ended property funds, some investors access property and infrastructure exposure through real estate investment trusts (REITs) or listed infrastructure funds, which trade on a stock exchange like a company's shares, generally offering better liquidity than open-ended physical property funds, though their share price can be more volatile in the short term as it responds to stock market sentiment as well as to the underlying asset values.
Correlation is not static — a deeper look
It is worth emphasising a point made briefly above: the historical correlation between any alternative asset and mainstream equities is not a fixed, permanent characteristic. Gold, for example, has at various points in history moved in the same direction as equities, and at other points moved in the opposite direction — its relationship with equities depends heavily on the specific economic conditions prevailing at the time, such as whether a market fall is being driven by inflation concerns, a genuine recession, or a specific financial crisis. This means alternative assets should generally be thought of as offering a plausible, historically-supported diversification benefit on average over long periods, rather than a guaranteed hedge that will reliably behave in a particular way during any single specific downturn.
A worked example
Suppose a hypothetical investor holds a £80,000 portfolio, currently split 70% global equities and 30% bonds, and is considering adding a small gold allocation as a further diversifier. They decide to allocate 5% (£4,000) to a gold-tracking fund, funded by trimming the bond allocation slightly, leaving the portfolio at roughly 70% equities, 25% bonds and 5% gold. They recognise this is a modest, bounded position sized so that even a significant fall in the gold price would have limited effect on the total portfolio, while accepting that gold's role is diversification rather than a reliable source of income or predictable growth.
Tax treatment of alternative asset funds
Held within an ISA or SIPP, gains from gold, commodity, property or infrastructure funds are free of Capital Gains Tax and any income generated is free of income tax, in the same way as with mainstream equity and bond funds. Held outside a wrapper, gains are subject to the same £3,000 annual Capital Gains Tax exempt amount and 18%/24% rates applying to other investment gains, and any income distributed — for example, rental income passed through from a property fund — is subject to income tax in the normal way, beyond the £500 dividend allowance where applicable or the Personal Savings Allowance where the distribution is characterised as interest rather than dividend income. As with any investment, using available ISA and SIPP allowances first is generally the more tax-efficient starting point before holding these assets in a general investment account.
A final word on expectations
Alternative assets are best approached with modest, well-calibrated expectations: as a potential diversifier at the margins of a portfolio, not as a core driver of long-term growth or a guaranteed shield against every kind of market stress. Treating them this way helps avoid both the mistake of ignoring them entirely and the opposite mistake of over-allocating to them on the strength of a compelling recent narrative.
Key takeaways
- Gold, commodities, property and absolute return strategies are sometimes used to add diversification beyond mainstream equities and bonds.
- None of these produce reliable income in the way dividend-paying equities or coupon-paying bonds do, with the partial exception of property and infrastructure funds.
- Correlation with equities is not fixed or guaranteed for any of these assets — historical patterns can and do change.
- Open-ended physical property funds carry a specific liquidity consideration worth understanding before investing.
- Where used, these assets are typically held as a smaller satellite allocation rather than a core portfolio building block.
- Always check current HMRC and FCA figures and allowances, as these change from tax year to tax year.