london ? Investors unnerved by the latest bout of stock market volatility might want to take a look at other possibilities ?like trees.

Forestry funds, property funds and fund of hedge funds are all becoming more popular, financial advisers say, because of their lack of ties to equity markets.

Property funds are arguably the most easily accessible and most heavily marketed of alternative investments open to the retail market. But Melvyn Bell of Lowes Financial Management urged potential investors to make sure they understand the type of property fund they are buying.

Some, he noted, are invested in building and construction companies rather than property development specifically and would therefore offer little diversity to equities.

Bell picked out the Norwich Property fund and the New Star Property fund as ones to watch. 揟hese funds offer a real alternative to equity markets in that 80 per cent is in physical property,?he said.

However, Darius McDermott, managing director of Chelsea Financial Services felt investors considering property should look to mix things up a bit.

揑 would suggest that investors looking to diversify should have something in the region of 10 per cent of their overall portfolio in property funds,?he said.

揑 would then suggest that they split this between funds such as the New Star Property fund ?investing in bricks and mortar ?and the Schroders Global Property fund, which is a REITs (Real Estate Investment Trust) fund and not directly invested in bricks and mortar.? McDermott added, 揑 think it is always good to have diversification in a portfolio but I am semi-wary about UK commercial property at the moment so I certainly wouldn抰 advise investors to be overly bullish about property as an asset class.?

FUND OF HEDGE FUNDS

Fund of hedge funds, unlike individual hedge funds, are available to retail investors.

These products use futures and options to effectively hedge against market corrections so by definition they should perform most favourably when the market is jumping around as it has been lately. When the market is flat, hedge funds are largely ineffectual.

揑 think for investors with portfolios in the region of ?50,000, alternative investments such as fund of hedge funds and forestry funds enter the equation as diversification options,?McDermott said.

揑n a bull market, fund of hedge funds return on average only 8 to 10 per cent so they are really only any use when markets are struggling. High charges and high investment minimums can often put these products out of the reach of investors with more modest portfolios.? However, McDermott picked out the Old Mutual Prosper 80 fund as one vehicle that might interest investors looking for a fund with hedge capabilities.

揟his is a very low-risk product that uses a mix of hedge funds and offers 80 per cent capital protection,?he said, noting it is producing 8.4 per cent return per year after charges.? The fund has an investment minimum of 5,000 pounds where many hedge fund products stipulate minimums of ?0,000-plus, which makes it attractive to retail investors.

FORESTRY FUNDS

Forestry funds are probably the least known of the alternative options. Their distinct advantage is that they offer three primary tax incentives, on income tax, capital gains tax and inheritance tax. Income and profits from timber sales in woodlands managed commercially, including income from the various national woodland grant schemes, are free from both income and corporation tax.

The gain in value of standing timber, whether from the physical growth of the trees or rises in timber prices, is entirely free from tax, and the sale price or transfer value of the trees is also left out of capital gains tax calculations. Only the increase in the value of the land is assessed for CGT.

However, capital expenditure on improvements such as new roads, fences or buildings used for business purposes, can be offset against the land value. The entire value of commercial woodland, including both the land and the trees, attracts Business Property Relief, currently at 100 percent, once it has been owned for two years.

Provided this condition is met, there is no inheritance tax liability. In addition, woodlands of outstanding scenic, historic, or scientific interest may qualify for Heritage Relief, allowing a conditional exemption from IHT.

Bruce Hutt a director of FIM Services, which provides both direct timber plantation investments and collective funds of timber plantations, has seen the interest in this alternative investment grow.

揟imber plantations offer asset-backed investments with low correlation to equities and gilts,?he said. 揊orestry funds currently provide returns of around 4 percent but that is untaxed so it is equivalent to 6.5 percent on a tax investment.?

One of the issues IFAs find difficult to accept in comparison to property funds is that the return is based on growth of trees. So if a proportion of the trees are harvested, taking a slice of profit, then some of the capital value is being undermined as a consequence.

In terms of who these products are aimed at, it is not strictly the case that they are the exclusive domain of the very rich. 揑nvesting direct in one specific plantation is admittedly going to be the preserve of the high net worth clients, with investments normally in the region of ?00,000-plus,?Hutt said.

揃ut there are collective funds where the minimum investment is set at ?0,000, which is far more feasible for some private investors.?Aside from the tax angle there are other key drivers, experts say, that maintain the appeal of forestry funds梟otably the uplift in timber prices and the environmental aspect for green investors.

With the environment ever more on the agenda, it is unlikely that any future government would take the unpopular step of scrapping the tax status of replanting projects.

It remains a niche market, largely driven by the US where in recent years $15bn has gone into forestry from financial institutions, mostly pension funds.

The UK market tends to follow the US and while the tax benefits for UK pension funds are not as tangible since pensions are already tax efficient, the diversification argument of forestry still remains pertinent.

If an investor wants capital appreciation from their forestry fund then it is best to invest right at the start of the plantation, the advisers say. If however the main priority is income, then it is best to invest in a mature plantation where income is coming back from the harvest.