How alternative can investments be?

Collective investment scheme

Author: Mr Chin28/07/2023

Some investments can be quite unconventional. For example, Lü Buwei, a Chinese merchant during the Warring States period, “invested” in Prince Zichu of Qin. As Lü helped the prince ascend the throne, he made himself the prime minister of Qin. The investment by Lü in people as if they were commodities is indeed alternative.

When looking into the investment universe nowadays, investments other than the conventional ones (such as stocks, bonds and cash) are in general referred to as alternative investments. They may involve a wide variety of assets, like real estate, different commodities and virtual assets which has become quite popular lately.

Alternative investments can be made by directly buying the underlying assets, such as acquisition of overseas properties and vineyards by some investors in recent years. Other than these direct investments, you may also have heard of the investment schemes and/or arrangements which involve the following alternative investments.

Investing in overseas farms

In Hong Kong where land is so scarce and expensive, it is not easy for ordinary people to enjoy the life as a farmer. Those who are interested in farming may be attracted by certain investment schemes on overseas agricultural projects (for example, tree plantation, durian growing or livestock breeding). Instead of running the farmlands themselves, investors will be required to enter into a custody agreement, which will authorise the scheme operators to appoint specific personnel or team(s) to handle the day-to-day operations and management of the farms. Investors will then be entitled to share the profits from the farm and the sale of the produce, or even receive a guaranteed quantity of produce or monetary return every year.

Buying land overseas

Real estate has always been a popular alternative investment for Hong Kong people. In recent years, there are real estate investment schemes not only investing in properties but overseas land parcels. While participating investors own the interests of a portion of the land according to their investment amounts, they do not have day-to-day control or the right to make operational decisions over their purchased units (e.g., they cannot occupy, use or lease their purchased units) and the land will be managed by a management company as a whole. If the land is sold at a higher price in the future, investors can share the return.

Points to Note for Alternative Investments

The breadth of underlying assets of alternative investments is beyond our imagination. However, many alternative investments are not governed by any financial regulators in Hong Kong. They may also carry higher investment risks or involve certain investment scams. Wine, overseas properties, gold and virtual assets are popular types of alternative investments in recent years, and relevant scams have also emerged accordingly.

As in the examples above, an alternative investment scheme or arrangement may constitute a collective investment scheme (CIS) if it contains the elements of CIS, such as investors do not have day-to-day control over the asset, the asset is managed as a whole by a management company on behalf of investors, and the purpose of the scheme/arrangement is for the investors to receive returns. Under existing regulations, only CISs authorised by the Securities and Futures Commission (SFC) can be offered to the Hong Kong public. Unauthorised CISs can only be sold to professional investors or pursuant to one of the other exemptions under the Securities and Futures Ordinance. You may refer to "What is a collective investment scheme?" to learn more.

Unauthorised investment arrangements, including those on SFC's "Suspicious Investment Products Alert List", and their offering documents are not authorised by the SFC, so the products may not be suitable for the Hong Kong public, and the product disclosures may not be clear and complete. As such, investors participating in these schemes may not be properly protected.