With the financial and emotional rollercoaster of recent market volatility, ‘alternatives’ could be a good option for some investors. Photo / Getty Images
The volatility of global markets in recent years has had a significant impact on investors and in turn how the industry has responded.
For financial advisers, it can be tough to see investors get the jitters and exit when the market declines.
The most painful part of this is the inevitability the market will rebound, and the investor will realise they have crystallised their losses.
A positive side of the uncertainty in recent years is that the asset management industry has become more innovative in what it offers everyday investors.
Things like managed funds and exchange-traded funds (ETFs) used to be the domain of institutional and hedge fund investors but now can now form part of a diversified portfolio.
With the market having been so volatile this year, it’s not surprising that savvy investors start to have more rigorous conversations about their investment strategy.
It’s at this point “alternative investment strategies” or alternatives as they are often called can be an interesting option to consider, if they align with the client’s risk profile.
The term alternative investments cover an ever-growing spectrum of strategies and investment types.
You’ve probably heard of things like hedge funds, infrastructure, natural resources, real estate funds and private capital.
By their nature, alternatives place less importance on daily pricing, and this helps the investor focus on long-term performance.
They allow people to diversify their portfolio and potentially lessen the impact of market volatility.
That’s because alternatives tend to have a lower correlation to investments like equities and bonds. This means they can potentially enhance returns and help improve the overall risk-return of a portfolio.
Alternatives have only gained in popularity in recent years.
That said, it is important for investors to understand the unique risks and nuances associated with the alternative investment class. Some of the main considerations include:
- Lack of liquidity
- More complex structures than traditional share and bond assets
- Longer lock-up periods or redemption gates on funds
- In some cases, a higher minimum investment amount and more complex performance fee structures
While many investors are attracted by a better overall return, those returns are often at the expense of liquidity and less transparent pricing, so alternatives need to be seen as part of a long-term game.
They often have a complex structure which may be difficult for most investors to understand, including the performance fees if returns exceed a certain level. And investors often need to commit to a long investment timeframe.
These timeframes can be referred to as lock-up periods or redemption gates.
It’s worth noting that one of the barriers to many alternatives is some require a minimum investment which can be simply out of reach of the everyday investor.
So, if you’re considering whether alternatives are right for your portfolio, consider talking to an adviser about your goals, future intentions and your tolerance for taking on increased risk.
Often, alternatives are best viewed as an “and” rather than an “or”, and as part of more traditional long-term investment options like equities, bonds and cash, that aim to enhance your return.
That said, how you allocate your assets over time can change as your circumstances change.
If you’re speaking with a financial advisor about alternatives, here are two important questions we recommend you ask:
- How can alternative investments help me better manage risk and seek higher returns in today’s ever-changing environment? AND
- Which alternative strategies are most appropriate for my investment strategy and financial goals?
A good adviser will stay focused on the overall allocation when considering goals and investment timeframes.
Simon Bradley is a Wealth Management Adviser at Jarden.
Jarden Securities Limited is an NZX Firm. A financial advice disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
Full disclaimer available at: https://www.jarden.co.nz/wealth-sales-and-research-disclaimer