Alternative assets – a catch term for a range of investments
When we think investing, we tend to think of stock and bonds. However, that’s only part of the picture. There’s another, increasingly common area beyond those traditional assets, broadly referred to as ‘alternative assets’. However, finding common characteristics that might help with their definition is a considerably more awkward proposition. Alternative assets is essentially a catch all term that refers to a range of investments with unique and diverse characteristics that, simply put, are not stocks and bonds. In other words, it’s not so much what they are, but what they are not.
Alternative assets – now more accessible
While they might be tricky to define, their use is as old as the act of monetizing assets itself. It’s just their realm has tended to be reserved for more sophisticated investors like that of institutions (i.e., pension funds) and/or accredited investors (i.e., the very wealthy), with opportunities being less available to the individual investor. However, as the world of finance has evolved in conjunction with various digital and legal innovations, alternative assets have become increasingly accessible.
Three reasons for their broad appeal
The broad appeal of such assets can be attributed to several factors.
- First, alternative asset returns are less correlated compared to those of traditional stocks and bonds, allowing them to serve as a valuable tool for diversifying an investment portfolio’s risk profile.
- Second, as interest rates sit at levels that fail to garner a decent risk adjusted yield, investors have begun to actively seek other opportunities that can offer a relatively more attractive return.
- Third, as modern society progresses further into the information and digital age, investors (not to mention financial regulators) have become more adept at monetizing assets, leading to the improved accessibility to transfer capital across a diverse spectrum of asset types for the purpose of conserving wealth or realizing a return at a point in the future.
Common investment types
Some of the more common types of alternative asset approaches include but are by no means limited to the following:
- Private Capital (Equity and Debt): Ownership of the equity or debt of companies not publicly listed.
- Hedge Funds: Private investment vehicles that manage portfolios of securities and/or derivatives using a variety of strategies.
- Real Estate: Investments made in buildings or land directly or indirectly.
- Commodities: Physical commodity products, such as grain or metals, either through derivative products, business engaged in their production or the actual physical commodity.
- Infrastructure: Capital intensive, long-lived assets such as roads, dams intended for public use and provide essential services.
They are by their nature – unique
The sheer range of alternative assets leads one to conclude that while they may share certain characteristics, they are by their very nature unique. They are commonly regarded as riskier than traditional assets, however, this is by no means a rule. For example, a hydro dam in Northern Ontario tends to have reliable electricity output (read: revenue) and subject to long life contracts. However, a derivative contract for a bushel of wheat has an expiry date, and at a certain point might be worthless. Illiquidity is also sighted as a characteristic, but again this not always the case; it takes time to buy or sell a skyscraper on account of a limited market and complex due diligence, while Bitcoin has a robust market (well, at least for now), which allows one to buy or sell them in seconds. Some have unique legal and tax consequences, like fine wine, while others are quite benign, like baseball cards.
Perhaps the common factor is that like that of bonds and stocks they serve as a potential vehicle to store and/or enhance wealth. And since they are different to that of stocks and bonds, as sophisticated investors concluded some time ago, they can offer an attractive complement to investors’ portfolio.
Contact your advisor at Kerr Financial to learn more.