A Quick Guide to Alternative Investment

Transcending beyond traditional investment strategies.

Trend of Alternative Investment

In the wake of the new, technologically advanced century, investment behaviour has shifted. With the traumatic market crashes of 2008 and 2012, even conservative investors have began to move towards alternative investment. This new behaviour from traditional investment to alternative is the result of an instinctive fear: that conventional stock investment alone makes the portfolio increasingly volatile.

There is sufficient evidence that shows modern investors being inclined to seek alternative investment options to find higher, safer returns, as well as a means to reduce market volatility. With the emergence of advanced technology and on-demand platforms, alternative investment options, particularly derivatives, is certain to receive much more attention and evolve in different directions to cater to the increasing demand for more risk mitigation, and higher customisation.

Defining the Alternative

The misconception among many investors is assuming all Alternative Investing are alike and fall under the same umbrella category - yet it is justified given how broad the term is.

In actual reality, Alternatives are a myriad combination of different asset categories, structures and strategies that are composed and catered for a wide range of investors. Nevertheless, without entering the deeper mechanics of specific Alternative strategies, we can observe that there are evident differences in the characteristics of traditional versus alternative investments.

Traditional investments such as stocks, bonds, or cash are assets that are straightforward and reliant on the market, leading to a “constrained” level of customisation and management. However, due to their exposure to the market, their liquidity is high, and the returns directly correlated to the market performance.

On the other hand, alternative investments provide higher range for customisation, and it is up to the manager to allocate the terms and strategies involved to gain advantage. As alternatives tend to be denser in calculating performance, the funds are generally less correlated to the market, resulting in less liquidity and slower capital flow. Managers of alternatives can therefore include strategies such as leverage and shorting due to less liquid capital.

The Benefits (and the Risks!)

We’ve categorised a few alternatives using a simple approach by ranking the diversification, yield potential, risk mitigation potential and risk premium potential (potential to earn more premium by accepting greater risk). This ranking chart is a useful guide for beginner investors who may be looking at certain aspects while building their alternatives portfolio and knowing how each strategy compares in place with others.

*Disclaimer: The ranking chart is devised according to market conditions in 2019.

Building your own Alternative Investment Portfolio

Allocating the right resources to build a comprehensive alternative investment portfolio is important to achieve the long-term goal, whether it is having adequate liquidity, value returns, and time period commitments. After breaking down the benefits and risks of the different asset classes, there are a few things to bear in mind for investors looking to build their own alternatives portfolio.

Developing a long term strategy to coincide the portfolio to be relevant in a fast-moving world.

Understanding and not underestimating the prevalence of technology in the growing investment world.

Constantly learning new skills and asset management strategies to stay competitive and knowledgable in the long run.

References: https://www.pwc.com/gx/en/private-equity/assets/rediscovering-alternative-assets-in-changing-times.pdf
https://www.blackstone.com/docs/default-source/black-papers/seeking-an-alternative_standard_v68_web.pdf?sfvrsn=fd0c2cad_22