Five core ‘alternative’ assets: Everything you need to know

The funding of such projects provides investors with the asset and receipt of any income generated. The building and maintenance of a toll road is a classic example of an infrastructure investment. The investor can partial fund the project with, for example, a government and once finished will enjoy the asset and any income generated for a lease period.

Infrastructure investments are similar to fixed interest securities in terms of return characteristics.

Attractions

• Diversification

• Often monopoly businesses

• Typically high barriers to entry

• Strong cash-flow generation and yield

• Active management potential

Risks

• Revenue model

• Skills mismatch

• Operational risks

• Liquidity constraints

Commodities

Commodities are usually thought of raw materials or basic goods and can be put into two types.

Soft commodities can be grown and can be a foodstuff or a manufacturing item. Examples are orange juice, pork bellies, maize, wool, cotton, sugar, timber, vegetable oil.

Hard commodities are thought of as being extracted and include basic metals, such as iron and copper, precious metals, such as gold and silver, coal and crude oil.

Attractions

• Low correlation to other asset classes

• Strong, if somewhat cyclical returns

• Inflation protection as either prices move in line or arguably cause inflation

Risks

• Time lag between investment and production

• Potential for loss between production and delivery

• Transportation risk - danger of loss of cargo

• Recent coverage regarding the pricing of commodities suggests that markets may not be as efficient as thought

Alternative strategies

Normally called hedge funds and classified previously for UK operated funds as Ucis (unregulated collective investment schemes), as opposed to Ucits (undertakings for the collective investment Of transferable securities) which are regulated. These investments are highly specialised and are used predominately by institutional investors and can be also used by so called sophisticated or qualified investors.

Global macro

One of the best known hedge strategies is global macro, and typically the one most people associate with hedge funds. These are ‘Gordon Gekko’ type funds with an investment strategy that take big bets, usually in any market, throughout the world.

They take positions that are very large weights in multiple investment types such as shares, fixed interest, credit rates or currency markets, usually in expectation of a change in the macroeconomic environment such as an interest rate change or currency movement due to central bank policy. An example was when the Bank of England exited the European exchange rate mechanism, or could be an unexpected change in the rate of an economic figure like GDP for example. They typically look to deliver a risk-adjusted return.