Investments 

Alternative investments: One way or another

    CPD
    60min

    Alternative investments have an image problem. When the FSA decided to crack down on the promotion of alternative assets, like overseas property and bamboo plantations, to retail investors, it went some way to tarring all investments in this sector with the same brush.

    Indeed, many unregulated collective investment schemes (Ucis) are considered inappropriate for the everyday investor because of their inherent risks, but there are many other so-called alternative assets that wealth managers consider as legitimate ways to diversify away from bonds and equities, such as vehicles involving infrastructure, private equity and hedge funds.

    The alternative investment market is large and is more accessible to the everyday investor than ever before. The Towers Watson Global Alternatives Survey 2012, which analyses the alternative investment market, shows total assets under management among the companies it tracks at $4.87tn. The 100 largest investment managers control some $3.13tn of those assets, which, in order of the assets invested, consist of real estate, private equity, hedge funds, private equity funds of funds, funds of hedge funds, infrastructure and commodities.

    Chart 1 shows Towers Watson’s breakdown of how the money invested in alternatives is distributed. It shows real estate as the single largest area of investment at 28 per cent, while private equity and hedge funds follow closely behind at 23 per cent and 21 per cent respectively. Infrastructure and commodities make up a small percentage of overall assets under management, at 5 per cent and 4 per cent, respectively.

    Chart 2, meanwhile, shows where in the world fund managers are investing their money. North America and Europe dominate with 45 per cent and 36 per cent of the market, while Asia Pacific has a 13 per cent stake.

    While many alternative investment funds have lacked strict regulation in the past, a big change is coming for hedge fund and private equity managers in the shape of the Alternative Investment Fund Managers Directive (AIFMD). This intends to bring private equity and hedge fund managers under the supervision of European Union regulators for the first time and could go some way to improving the sector’s image.

    Ultimately, the investment chosen depends on a client’s attitude to risk and financial goals. But, even more than that, alternative investments to a large degree depend on a client’s interests and the amount of wealth they have, because, apart from a few dozen retail-focused funds investing in these assets, the alternatives market is one that can have high barriers to entry.

    Alternative vs everyday asset

    For many people, the moment the phrase ‘alternative asset’ is mentioned, it raises alarm bells. This, says James Maltin, investment director at Rathbone Investment Management, is partly due to the bad press alternatives received in the aftermath of the 2008 financial crash.

    Because the likes of Ponzi schemer Bernard Madoff and hedge fund managers are associated with this sector, many investors have formed a negative opinion. Furthermore, more esoteric assets like fine wine and art are linked with instances of fraudulent deals, which has also done little to promote a positive view.

    CPD
    60min
    1. What is one definition of an alternative asset?

    2. True or false? Fine wine and art investments can be promoted to retail investors.

    3. Which alternative assets are most likely accessed through mainstream FSA-regulated open-ended funds and investment trusts?

    4. Commercial property can be attractive for which characteristic?

    5. What will the Alternative Investments Fund Manager Directive do?

    6. Infrastructure investment trusts are currently trading at:

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