Are your investments running on a deficit? Or did you start to invest later on and don’t feel like you can achieve your financial independence soon enough? If so, read on. We are talking about a new way to diversify your portfolio, with assets that have low correlation with traditional investments with high return potential. Let me introduce you to alternative investments, a.k.a. alts. There’s no specific definition, although alts educator from CAIA 1 (Chartered alternative Investment Analyst Association) has come up with the following concept: any investment that is not simply a long position in traditional investments. By traditional investments I mean fixed income (i.e. bonds), public traded equities (i.e. shares), and cash (i.e. savings).
Alts represent 12% of the Global Investable market (GIM), offering $13.4 Trillion in opportunities in 20192, and Private Equity, Hedge funds, and Real estate represent 84.3% of that 12%. The trends are very favorable for alts, which are expected to grow to 18%-24% of the GIM BY 2025, representing almost a quarter of investment in the world. These are major-league figures, so why should a regular investor or even a curious investor care about Alts? In brief: technology and pensions funds.
As we have discussed before, new technologies have enabled businesses to deploy different kinds of investment vehicles. Through fractional ownership, you can break down a high-value commercial build into small ownership pieces and make an offer to an investment platform. We have witnessed the same thing happening with whisky, wines, and arts. Alts offer a fresh way to diversify your portfolio into all sorts of low correlated assets, mitigate your risk, and increase yields potential in a new and innovative manner.
Pension funds have been running a deficit for years and are therefore looking to diversify in the quest for greater returns. These circumstances are making them reassess their risk/reward strategy and look for low correlated assets with high yields potential. Alts offer an elegant solution to this challenge.
A word of warning: alts are a volatile, high-risk investment class, with a larger potential for loss than traditional investments. It goes without saying that you should educate yourself about the alts investment you’re buying and conduct a comprehensive due diligence. For alts, you need to dig deeper than ROI, yields, and interest data.
The investment path is moving toward democratization. The regular investor matters more than ever before. You don’t need to have a deep pockets or risk everything to benefit from a great investment opportunity. The principles of diversification apply to alts as much as to any other type of investment: commodities down, whisky up, investment protected.
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1 – caia.org
2 - https://caia.org/sites/default/files/2021-02/CAIA_Tokenisation_of_Alternatives.pdf