Investing in the Alternative Space

The turbulent start to the year has left many investors with significant exposure to traditional investments feeling less than satisfied. The highs of May 2015 seem a distant memory  with many indicies reporting significant losses in the first few months on 2016. The MSCI Emerging Marketing Index, for example, is down 35% from the highs achieved last year.

With stocks and bonds underperforming, perhaps it’s time investors started to consider an investment into an alternative asset class to compliment the traditional asset classes they already hold.

A report by UBS and Campden Wealth found that many billionaires were already successfully using alternative investments to hedge their more traditional investments. In a survey of more than 100 billionaires, the average person or family held approximately 25% of their wealth in alternative investments, significantly more than most investors.

Is it time for other investors to follow suit?

Avoid Market Volatility

The biggest reason to consider an investment into an alternative investment is to offset against market volatility.

Traditional investments, being highly liquid, are subject to severe volatility, as we’ve seen in the last few months. Because they are easily bought and sold, they are vulnerable to the unpredictable changes in the market; which the average investor does not have time to react, with many selling at the first sign of trouble.

Alternative investments protect the investor from short-term market fluctuations  and due to the individual trading strategy adopted by the investment manager.

Which Alternative Investment?

The large range of available alternative investments, coupled with the expertise required to trade in some of them successfully, is the most significant barrier for investors. That said, the range of alternative investments available in the market provide plenty of opportunity for the investor  when advised upon correctly.

Possible alternative investments include:

• Venture capital
• Private equity
• Commodities
• Hedge funds
• Precious metals
• Art
• Wine
• Systematic Trading

The performance of these assets typically has a low correlation to that of stocks and bonds, a fact that makes them easier to value than you might think, which ensures that you are more protected against short-term shocks.

Alternative Investments Vs Traditional Investments

A common question is whether alternative investments are better than traditional investments.

Alternative investments have lower volatility, less ongoing maintenance (although higher upfront fees), and some tax benefits. Returns can be calculated on a monthly basis with substantial returns experienced at point of investment in some cases.

Traditional investments, on the other hand, have high volatility and changes in investment value can occur daily as market changes dictate. They also require significantly more attention because time and money will need to be spent to make informed changes on an ongoing basis.

So what’s best?

While some investors have a favoured type of investment, the truth is that both traditional and alternative investments are viable and should both be included in their portfolio.

Investors should not make wholesale changes to their existing portfolio of stocks and bonds in favour of alternative investments, but rather should compliment their traditional investments with alternatives. This will ensure that investors will reap the benefits of a truly all weathered portfolio by holding both forms of asset class in the same portfolio.  

Break Out of Your Comfort Zone

With many investors solely reliant on stocks and bonds, considering alternative investments to a portfolio can be a step into the unknown which is why specialised advice should always be considered outside your comfort zone. However, the potential upside should be considered given the current levels of volatility being experienced by traditional asset classes. And it could be argued that the actual risk by not diversifying a traditional investment portfolio could create  unnecessary risk.

Investing in alternative asset classes can help you protect your investments against market movements, while at the same time providing tax benefits while at the same time providing the potential to increase the original sum of money invested.

Of course, as with any investment there are still risks, so investors should consult with their financial advisors before considering the alternative investment universe.

At St James Place, we provide a range of value added services, including within the alternative space. Visit us here to find out more: https://www.sjpp.asia/charlesedwards/