Earth scientists are learning more every day about the World we can see and increasingly, the World we can’t see. Nano-technology and electron microscopes are helping them to discover new life forms and ecologies almost daily.
Meanwhile, astro-scientists are learning more each day about the Universe we can see – and apparently, the Universes we can’t see!
In astronomy circles Alternative Universes are purely theoretical at the moment, but in investment circles, I am pleased to say that the “Universe of Alternatives” is vast and positively a reality.
“Alternative investments” is a wide-ranging term which includes many asset classes and strategies that, as readers will know, are essentially anything other than equities, bonds and cash. It’s a “catch-all” term that has almost as many permutations as there are stars in the sky.
However, the problem is that many Alternatives have been crafted that are great in theory but often prove difficult in practise. The strategy, when being assessed, needs to include considerations that include suitability for the investor-types to whom they are being offered. For example, insufficient liquidity can rear its ugly head all too often, leading to gating and suspension. Never a nice experience for either manager or investor.
Recent multiple suspensions across a number of asset classes has led to a general avoidance of Alternatives by many investors and their advisers. This may be a good thing if their investment outlook is to be content with the returns and volatility provided with the mainstream investment classes that make up traditional investments.
However, as has been reported widely, many large investors including some of the World’s SWFs, are increasing their allocation to Alternatives significantly. Clearly, their extensive resources permit the flexible attitude that Alternatives investing requires, and thus permits them to fund investments such as infrastructure, technology and life sciences.
Generally, though, for the average private investor without substantial investable capital, Alternatives can be a step-too-far. Liquidity is possibly the key concern here as individuals may not have the flexibility to let a longer-term Alternative investment run its course. Many mega-investors will simply not want to see their money back quickly whilst some private savers have no choice should their health or personal circumstances take a turn for the worse.
So, for those who have the resources, the expertise and the investment horizon required for sensible Alternatives investing, what is available within this Universe of opportunity we mentioned earlier?
The obvious answer is “practically anything” but to be more specific, some Alternatives that may be worth considering could be Student Housing and its complementary bedfellow Co-living, Long Term Care Provision, Renewable Energy and Private Debt. These asset classes now include such a wide range of opportunities, this whole article wouldn’t have the space to fit them all in.
But what we can highlight, are some pointers to what drivers you should look for in a worthy Alternative investment.
Does it make sense?
The theory sounds great, but what if the result/product of the investment has little market opportunity? What if the purpose to which the invested capital is put doesn’t have an obvious end use? Do your clients understand how the investment works? Many investment vehicles these days are highly complex and how they create returns may only be fully understood by a small group of people. While it’s not essential to know the minute complexities, maybe it makes sense for them to have a workable understanding of what’s happening to their money.
Does it match their timeline?
Remember that few Alternatives, even within a fund structure, are listed assets and therefore will not usually have a ready market for disposal. Real Estate Alternatives especially, but many other types of investments, will take time to liquidate and for them to receive their cash back. Even a fund that has a stated redemption policy can find that is a tough discipline to maintain, so expect notice periods and liquidation schedules to lengthen unexpectedly. If that could be a problem for them, maybe they shouldn’t invest.
Correspondingly, they may wish to allocate cash to an investment that has a targeted, distant time horizon so make sure they don’t get “kicked out” ahead of their re-investment schedule.
Is the Alternative recession-proof?
Easy answer is – is anything recession proof? Well, some like Student Accommodation can claim this, but some will fare better than others and this is where your homework can come in and save your hide! Especially when long-term investing (pretty much a prerequisite for Alternatives), take account of likely economic changes as best you can. Do remember that some Alternatives can potentially guard against damaging recessionary pressures – certain Infrastructure assets perhaps. Others may suffer badly in a down-turn. Be ready for economic changes (good or bad), as they can have a marked impact upon your returns.
Taking advantage of the Alternatives Universe
By way of conclusion to this short journey into some of the concepts behind these opportunities, the key is, as usual, let the buyer beware. In other words, before venturing into any alternative investment strategy, think through how the time horizon needed for the strategy to work fits in with your clients’ present and future plans.
Alternatives provide sometimes new and interesting ways to create income and growth, provide diversification and reduce a portfolio’s correlation to mainstream traditional assets. Ensure the routes to accessing (and exiting) these esoteric asset classes is suitable – many Alternatives fund structures work very well. However, that needs planning and thought and the fund’s constitutional document, irrespective of fund type, should be prepared carefully.
Enjoy the journey.