Introduction

There are loads of different alternative investments in Malaysia. Some of the investments investors will know inside out, some of the investments that investors might have come across once or twice, and some of them will be brand new. Alternative investments are created to provide a solution. With the assistance of a professional investment manager, they could potentially provide a reliable income stream and diversification.

Key takeaways

• Different alternative investments have varying characteristics, risks, and maturities. Investors need to choose the best investment based on their tolerance for risk.
• Investors must understand their choice of investment before investing. If they fail to do so, they could lose their entire capital investment and suffer severe losses.
• Investors should always read the prospectus and required shareholder reports before investing. They should also make sure that the investment adviser is registered before investing.

Types of Alternative Investment in Malaysia

In Malaysia, there are 7 types of alternative investments that are popular. In this article, these 7 types of investments will be divided into 5 different categories for comparison.

1. Funds related: Unit Trust vs Exchange Traded Funds

Sources: Bursa Malaysia and More Money Malaysia

The main difference is that ETFs are traded like a stock throughout the day on a stock exchange, ETFs have a bid-ask spread, and therefore a greater implied cost most of the time. Unit trusts trade at the fund's net asset value (or the underlying value), which is based on the market closing price that day and is more suitable for long-term investors who do not need intraday liquidity. (Endowus)

Read more:

• Are ETFs a Good Investment?
• ETF in Malaysia
• Hedge Funds vs Mutual Funds: Which is Right for You?
• All You Need to Know About Unit Trusts: A Comprehensive Guide For Beginners

2. Others: Equity Crowdfunding vs Peer-to-peer lending

Sources: Securities Commission, Securities Commission and More Money Malaysia

ECF and P2P lending are two great options for small businesses looking to raise capital. However, these types of investments are considered high-risk, so investors need to have a strong understanding of financials before getting involved. ECF is when investors invest in a company and receive partial ownership in return. As shareholders, they're entitled to a portion of the company's profits (if any) and can sell their shares if the company goes public. Companies that use ECF are typically SMEs, which tend to be larger and more established than companies seeking P2P financing. (MyPF)

On the other hand, P2P investors are typically more interested in receiving regular interest payments on their investment, rather than owning a share of the company. P2P lending offers investors the opportunity to diversify their portfolio across many different loan opportunities with a relatively low minimum investment. However, since the borrowers are often startups or small businesses that aren’t well-established, there is a risk of the company defaulting on debt and the investors being unable to receive their investment returns, or even losing their original investment. (Whiteman)

3. Real estate: Direct vs. Indirect Real Estate Investing

Sources: Bursa Malaysia and More Money Malaysia

Investing directly in real estate comes with a number of advantages, such as additional rental income and tax benefits. However, there are also some disadvantages to consider, such as the illiquid nature of the real estate and the fact that it concentrates the portfolio on one asset class. Therefore, investors often prefer to invest in real estate indirectly, through real estate investment trust, rather than directly owning property. An investment in a real estate investment trust (REIT) provides indirect exposure to the potential benefits of real estate appreciation, without the need to commit a large amount of capital to one property. This gives them flexibility if they need or want to sell, and exposure to shared risks can be managed according to their needs. The lower entry point for REITs allows investors to start with a smaller investment, spread their capital among multiple trusts or funds, and pursue the potential benefits of property investment with less risk. (Robert Cobean)

Read more:

• Are Real Estate Investment Trusts Right For You?
• The Ultimate Guide to Real Estate: Everything You Need to Know

4. Commodity: Physical Gold vs Gold Futures

Sources: Bursa Malaysia, Loanstreet, Forbes and More Money Malaysia

There are some key differences between investing in physical gold and gold futures. For instance, physical gold needs to be insured and safeguarded, which can add to the costs of owning it. Investors who rely solely on the appreciation of gold prices to generate a profit are missing out on other potential opportunities. On the other hand, investing in gold futures has several advantages, the most significant of which is the high level of leverage available. With relatively little money, investors can purchase gold futures contracts. If they correctly anticipate the direction gold futures will move, they can make a large profit quickly. However, if the market moves against them, they will need to post additional margin to maintain their position; otherwise, their broker will close their position and they will incur a loss. (Omar Ortiz)

Read more:

• Gold and the Stock Market: A Correlation You Can't Ignore

5. Collectables: Art, Antiquities & Jewellery

Sources: More Money Malaysia

How can retail investors in Malaysia access other Alternative Investment products via foreign brokers?

Malaysian retail investors used to have restricted access to international markets and investing in overseas stocks entailed high transaction fees. However, the process is becoming simpler and more affordable as more foreign brokerage firms enter the region to compete with local players by offering competitive rates and diverse products.

US brokerage company Charles Schwab, for example, opened an office in Singapore in November last year. This gave Malaysian, Singaporean and Thai investors direct access to the US market and zero trade commissions for a wide selection of exchange-traded funds (ETFs.) The previous year, Singapore-based iFast Financial Pte Ltd which operates Fundsupermart.com - launched the online platform FSMOne. This offered US and Hong Kong-listed securities to investors, including Malaysians. Other online brokerage services that Malaysians have access to include those offered by US-based firms Interactive Brokers (IB) and TD Ameritrade.

The cost of investing in foreign stocks is still a major concern for Malaysians. The entry of more foreign brokerage firms could potentially solve this problem, as many of them operate entirely online, charge lower fees, and offer access to a wider range of markets and a large variety of products. (Tan Zhai Yun)

Things to take note of before investing in alternative investment

1. Foreign brokers are not regulated by the Securities Commission Malaysia

The Securities Commission Malaysia has advised investors not to deal with any unlicensed or unauthorised platforms, as this can expose them to risks such as fraud or money laundering. For example, foreign brokers such as TD Ameritrade, eToro and Tiger Brokers are on the SC's Investor Alert List, which identifies unauthorised platforms.

Although appearing on the Investor Alert List doesn't confirm that a platform is fraudulent, it's worth noting that these platforms aren't regulated in Malaysia. They're usually regulated by international authorities or the national regulatory authority of the country they operate in. For example, TD Ameritrade Singapore is regulated by the Monetary Authority of Singapore, while its international counterpart is regulated by the Securities and Exchange Commission (SEC) in the United States. If Malaysian investors have a dispute with any of these platforms, they won't be able to resolve it through the Securities Commission in Malaysia. (Lim Jen Li)

2. Investment Objectives

The investment objectives of alternative investments can vary greatly. Some investments might aim to take advantage of a manager's expertise in a particular area, such as investing in specific commodities. Others might provide diversification by investing in commodities, foreign currencies, and other alternative investments. Before considering any alternative investment, investors should make sure it meets their investment needs. (SEC)

3. Risk associated

All investment vehicles come with some degree of risk; it is crucial to comprehend the risks associated with the investment before becoming involved. An investor's risk appetite should guide their investments, helping them make the most of their money. If they want to protect their initial investment, they should go for lower-risk options, though the returns may not be as substantial. However, if they're hoping to make a lot of money and are willing to take risks, their portfolio will look different.

4. Fund Manager

Investors should do their due diligence on the fund manager, such as how long he or she has managed the fund and what his or her prior management or professional experience is. This type of information can be found in the fund’s prospectus, which will give investors an idea of whether it is a wise investment and whether the financial goals set by the fund manager are achievable. (KFintech)

Prospect of Alternative Investments in Malaysia

The alternative investment market in Malaysia has seen impressive growth in recent years and there is potential for further development. Equity crowdfunding (ECF), peer-to-peer (P2P) lending, venture capital and other verticals have become increasingly important as investors seek higher returns than what conventional products can offer. The pandemic was the biggest challenge the industry faced, but it rebounded with innovations, new launches, rising demands and transformative initiatives. The Malaysia Co-investment Fund (MyCIF) was set up under Budget 2019 to promote co-investments in micro, small and medium enterprises (MSMEs) and social enterprises alongside private investors via ECF and P2P platforms. This will help to further promote the growth of the alternative investment market.

The bottom line

All investors must remember that it is important to research their investment options before making any decisions. Just like when they consider buying a house or car, this is a long-term commitment that requires a lot of research and is actually an investment in itself.

References

• Bursa Malaysia. Exchange Traded Funds (ETFs).
• Bursa Malaysia. FAQs on Real Estate Investment Trust (REITs).
• Loanstreet (November 2022). Top Performing Unit Trust Funds in Malaysia 2022.
• Loanstreet (October 2018). Guide to peer-2-peer lending for businesses in Malaysia.
• More Money Malaysia. 25 Types of Investment in Malaysia.
• Omar Ortiz (October 2022). Invest in Gold in Malaysia – Beginner’s Guide.
• Paul Marston. How Does Crowdfunding Differ to P2P Lending?
• Robert Cobean (September 2020). What Are The Differences Between Direct And Indirect Property Investments?.
• Securities Commission Malaysia. Frequently Asked Questions (Faq) On Equity Crowdfunding (ECF) Framework.
• Securities Commission Malaysia. Frequently Asked Questions On The Peer-To-Peer Financing (P2P) Framework.
• Tan Zhai Yun (December 2018). Investing: Making it easier to invest in foreign stocks.

Author

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This article is written by Lim Wuan Chin, Research Analyst Intern

Lim Wuan Chin is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Wuan Chin joined TED Optimus Sdn Bhd for 3 months as a research analyst intern. She has participated in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.