Not All Alternatives Are Equal
Updated: Jun 4, 2020
Past The Artisan newsletters have focused on the alternative investment space, each highlighting their characteristics, benefits, drawbacks and opportunities. There has been a great deal of information covered to date. Investing in alternatives has gained a lot of momentum, as global assets under management (AUM) have grown at an annualized pace of 10.7 percent, to a record high of $7.2 trillion in 2013. This surge in growth and myriad of new money managers present new challenges for investors. This amplifies the importance of sound investment and operational due-diligence. Investing in the asset class of real estate has been done for thousands of years. However, in today’s world, it is considered an ‘alternative investment’. Which begs the question, alternative to what? It is an alternative to the publicly accessible exchanges and markets.
The actual term “alternative”, is a broad-basket term to define investments not accessible through the public markets. We often refer to buying equities as going ‘long beta’, which is simply a measure of the volatility or market risk of a security compared to the broad market. The desire to diversify away from the broad markets is demonstrated by recent performance. As of April 1, 2016, the S&P 500 is up 1.40% for the year. The S&P 500 index started off the first week of 2016 with a loss of 6 percent - its worst start since its inception in 1957.
With that said, the argument for increasing exposure to non-market correlated assets is easy to make. This is where the challenge begins.
Within the term “alternative investing” there are hundreds of subcategories across five main asset classes. Each has unique characteristics and varying correlations to each other. In addition to assessing each strategy and how it may contribute to achieving the investor’s end-goal, there is a further complication of investing in a team of people – people are susceptible to making mistakes.
There are two broad sources of risk that should be considered when assessing alternatives for potential investment- investment and operational. Investment risk considerations refer to whether the strategy undertaken by the fund will produce superior risk adjusted returns. It is also important to ensure the strategy’s return profile complements the investor’s long term objectives. Operational risk focuses on the actual ‘running the business’ aspect of hedge funds and private equity firms. How these businesses conduct their operations are a significant part of their ability to create value for their investors. Loose policies can increase the odds of malicious employee activity or theft through hacking. Northland Wealth’s investment and due diligence process pays significant attention to these risks and addresses them with utmost importance.
Alternative investments have been part of the investment strategy Northland Wealth has offered clients from its inception in 2011. Today, we continue to source and evaluate alternative investments of institutional quality that will add value to our clients’ portfolios.
The families Northland serves can rest assured that we understand that not all alternative investments are equal.