25 May Factors to take into account before investing in alternative products
In the last few years, it is getting more often to read or hear in the financial media about “alternative asset management” or “investment in alternative products”, and even more since after the subprime crisis. The expansionary policies of central banks that have taken the interests rates to their minimums during many years, has made investors consider other investment alternatives with the aim of trying to get more attractive returns, similar to those offered by fixed income in the past, but without having to bear the risk of stock markets. Taking as a reference Spain, the 10-year Bond got to price above 7% in 2012 and nowadays is at 0,72%.
But before investing in this type of products it is important to know what they are, because generally the word “alternative” has a negative connotation, and, in this case, it is nothing further than the true. I believe there are many definitions that we can find and all of them are valid.
Essentially, the alternative investment is the investment in any product or asset that is an alternative to traditional fixed or variable income assets, with the aim of:
- Obtain a positive return that is above the traditional
- Decrease the risk
- Reduce the correlation with the market to achieve a higher diversification.
If we go back to my beginnings in the financial sector, almost 25 years ago, the investment in alternatives focused, almost exclusively, on fixed income and equity products and, occasionally, on commodities. However, today investment in alternative assets is innumerable. In many cases, this type of alternative investment is nothing new and it is done for several years. Nevertheless, they did not reach the investor as an investment complement.
The different types of investment in alternative asset management are mainly focused on:
- Private debt
- Real estate
- Infrastructure
- Private equity
- Hedge Funds
Here the literature is vast and extensive, so I will leave this topic for an upcoming publication.
Focusing on the headline of the article, the objectives of investing in such assets are clear:
- Improve the return-on-risk relationship
- Achieve a greater portfolio diversification
A number of aspects need to be considered before investing in such strategies. Sometimes these types of products are more complex or riskier and require further study or advice. In addition, its higher profitability may be linked to a longer investment period or greater illiquidity. Therefore, the investment target return and horizon of time to achieve it should be clearly defined. These products may not be suitable for all types of investors, due to regulatory restrictions and minimum amounts of investment.
The adjusted returns offered by traditional assets in recent years, together with the advantages of investing in alternative assets and the easier access to them, has caused a very relevant grow in the alternative investment management, and that the majority of financial advisors and asset managers increasingly recommends investment in this asset class.
Finally, I would like to add that, in Laurion, we use as a main strategy the investment in alternative assets aiming, in the long term, to preserve our capital while trying to achieve above average returns.