Alternative investments, which have been used by large institutions for quite some time, have become more mainstream in recent years. Individual investors are more attracted towards Alternative investments in the recent past.
An alternative investment collectively refers to many asset
classes that fall outside the traditional asset classes like Stock, bond and
cash. Category includes Hedge Funds, Private equity (Venture Capital and
Leveraged Buyout), Real Estate, Commodities (Managed Futures), structured
products and Collectibles. Given their
non-traditional approach and their ability to invest in areas and ways
traditional investments cannot, and their low correlation to traditional
investments they have the potential to improve the overall risk-return
characteristics of a portfolio and enhance the portfolio diversification.
Some of the Strategies and approaches in Alternative Investment
includes, Holding both Long and Short position in the security, Holding private
securities instead of publicly traded securities, Using Derivative products and
Leverages, Exploiting Pricing Discrepancies between different asset classes,
Real Estate investments includes Residential and Commercial property and
REIT’s( Real Estate Investment Trusts ) and Investments in Commodities. Some
Wealthy Investors even consider investing is collectibles like Stamps, Wine,
Antiques, and valuable Arts.
Benefits of
Alternative Investments:
There is evidence that over the last 20 years, returns on
Alternative Investments have been higher than the return on traditional
asset classes. Despite unique and higher risks considerations, alternative
investments can be useful tools to improve the risk-return characteristics of
an investment portfolio. They can increase diversification and reduce
volatility, given low correlations to more traditional investments. They can
offer the potential for enhanced returns due to the wider investment opportunity
set. And they can hedge certain portfolio exposures, thereby reducing
concentration risk.
Disadvantages of
Alternative Investments:
Some of the Disadvantages and Risks associated with
investment in Alternative investments are, Higher Fees structures, more
complicated strategies which the layman cannot understand, less transparency
and Liquidity, Credit risk, disappointing
returns during strong up markets and most importantly no diversification
during down market trends.
To Conclude, with increased investment knowledge of modern
investors and readily available information on Alternative Investments, these products looks more
attractive to the common investors. Considerations one has to keep in mind
before incorporating alternative investments are their approach towards
it and appropriate asset allocation. Some of the due diligence one has to
consider before investing is, Product’s Investment Strategy and Process,
Historical return and Valuation, AUM, Management style, Reputation and System
of Risk Management.
An ideal asset allocation states that one should have 10 to
20% of his portfolio exposure in Alternative Investments. But as a rational
investor one should consult his financial planner before he could finalise
buying these types of product.
