Alternative Investments

By DavidGreth on January 20, 2011 In Home and Family





This article is brought to you by the people at Los Pandos

The first point of consideration is to establish what constitutes an alternative investment. Simply put anything outside the four main established asset groups of Cash, equities, Fixed Interest and Real Estate (or their sub groups) can be considered an alternative investment.

Investors must be aware that with many of these investments there is no protection under regulatory rules set down by central authorities or indeed no claims protection under ombudsman services.

While some alternative investments could give an income while you hold them – such as investing in a racehorse – most don’t generate a regular income and must be viewed as medium to long term investments.

For these reasons most are considered volatile and high risk and are really best suited to experienced investors.

Examples of alternative investment groups are Commodities, Hedge funds and Private Equity.

Commodities

So investments like art, fine wine, antiques or even film production would all be considered alternative and are very stand alone and not dependant on the normal investment considerations of economic cycles etc. In other words they are not correlated in any way to other things that are happening such as interest rates, unemployment trends or input/export trends.

Hedge Funds

A hedge is basically a financial strategy that offsets the risk from one purchase by buying or selling others. There are two basic reasons for investing in a hedge fund; to seek higher net returns and to seek diversification away from main asset classes allied the preserving capital and delivering positive returns under all market conditions. Of course higher returns are not guaranteed as hedge funds do not invest in the same entities as individual investors or other collective funds. It is still therefore reasonable to conclude that positive returns are achieved by selecting a superior fund manager or being very timely in selecting a particular strategy.

The other aim can be to create diversification in a strategy. If individuals have a spread of the main asset classes they may feel that by including a proportion of completely stand alone and non-correlated investments will reduce total portfolio risk.

Traditionally risk is measured by volatility, or how low returns fluctuate over, say 1 year. Surprisingly most studies demonstrate that hedge funds, on average, are actually less volatile than the stock market.

The problem is that hedge funds have a skewed experience of volatility. This means that most hedge funds have positive experience of returns but with a few cases of ‘extreme losses’ which makes sector… more volatile than is actually experienced across the market.

Private Equity

This is a broad term that refers to any type of investment in any type of investment in an asset which is generally not tradable on a stock market.

The fact that this is generally an investment into smaller companies with little flexibility in respect of timescale for returns means that achieving higher rates of returns is the main driver for investors.

Historically private equity investments have been utilised by very wealthy individuals for a proportion of their portfolio as the associated. Volatility is balanced out and the long term investment cycle does not have an undue affect on their wealth situation.

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