Alternative Investments You May Not Know About!


Read this article to know about alternative investment options. Know what type of investors who can target alternative investments and the of alternative investments. Read on to know the procedure and benefits of alternative investments

First let us start with the definition of alternative investments. These refer to investments in asset classes other than the traditional three – bonds, equities and cash. Alternative investments are targeted at high net worth individuals/investors given the level of sophistication, lack of regulation and illiquidity. Another important feature is the minimum level of investment required and the fees charged. The main objective of these investments is to provide possible opportunities to investors to take exposure to assets that have less correlation with traditional investment vehicles while simultaneously providing an opportunity for diversification. Once we understand the investment patterns, let us then look at the limited data available to see how these investments have performed.

Investments

: The investments are held in Separately Managed Accounts, hedge funds, venture capital funds or Real Estate Investment Trusts. These are typically pooled investments where the corpus is aggregated from various investors and invested into these assets. Retail investors can get access to alterative assets through REITs.

Performance Track Record

: There is very little data pertaining to performance of this asset class, available in the public domain. This is due to the low degree of regulation they are subjected to and also the fact that these are not advertised to retail investors. By their very nature, these investments have low correlation to traditional investment avenues. Hence, when traditional investments start performing well during bull markets, alternative investments run the serious risk of underperforming. The high cost structure associated with these investments would drag their performance down further.

Some pension funds and endowment funds have started investing in these asset classes. While some pension funds are explicitly prohibited in alternative assets, some of them who have no such restrictions have taken a small exposure to such assets.

Empirical Data

: An article published in Forbes magazine titled "Las Vegas on Wall Street" talks about the underperformance of hedge funds benchmarked against the S&P index by 6.5%. In another study titled "Venture Capital at Crossroads", when the performance of these funds was analyzed, it was found that the returns were on par with passively managed index funds on Internal Rate of Return basis comparison.

Investment Decision

: With the limited data available, there does not seem to be a strong case for investment in these sophisticated products. With the high degree of illiquidity and higher fee structure, as an investor, you would expect superior performance. Given the attractive commissions that wealth management professionals would earn from selling such products, these are heavily pushed to high net worth customers. And such investment decisions may not pay off well across market cycles which should be the primary purpose of these investments. Hence, this asset class not being available for investment should not make a retail investor disappointed. You are better off with traditional avenues of investing with a well-diversified portfolio. A diversified portfolio across asset classes would comprise assets that have a low degree of correlation and should help you tide over market volatility and enable you to take advantage of the upsides during bull markets.


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Comments

Author: Partha K.08 Feb 2017 Member Level: Platinum   Points : 4

I started reading the article with interest. But after finishing it, I am bit disappointed. The author has discussed only the hedge funds. In India, very few people know about hedge funds. According to SEBI regulations, hedge funds fall under Category 3 of Alternate Investment funds. The SEBI-prescribed requirements to start a hedge fund is very tight. Moreover, almost no reliable information is available about hedge funds.
The author has not mentioned anything about other alternate investments, for example, investment in real estate, investment in commodity and investment in art, etc.
I feel that the article is incomplete. The author can mention other alternate investments in the second part of the article.



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