Alternative investments and what to assess

TAlternative Investor Here are those that seem to come up more than others during this process.

With a few exceptions, most alternative investments require investors to shoulder at least some degree of illiquidity, whether monthly, quarterly or even over many years.

If there is a portion of your portfolio that you have no plans to access for many years (or even during your lifetime), giving up some liquidity in exchange for lower volatility and more predictable returns may well be worthwhile.

This is not to say that large percentages of your assets should be invested in funds that tie up your money for years at a time, but rather that than a “liquidity at any cost” approach will work against you in these uncertain times.

If you’ve ever owned a rental property or run your own business, you are already an alternative investor. Real estate and private equity are two of the most recognizable alternatives, and are often the perfect way to ease your way into this space.

If you recognize your investments as something understandable, you will be more comfortable with them as you move away from stocks and bonds.

There is a world of difference between the words “simple” and “easy” when it comes to investments, because many of the simplest models are the most difficult to execute.

For example, an alternative private debt investment fund is very simple: lend money to borrowers, take a management fee and pay the difference to investors. To run such a fund profitably, however, is very difficult and requires significant experience and expertise.

Even though you must always satisfy yourself that investment managers have the necessary skills, it is often a good start to find strategies that are not overly complex. Complex strategies (such as those that use structured products, which are designed to provide attractive tax-efficient and predictable returns) may be suitable for you, but your comfort level might be higher with models that are more easily defined.

Many institutional investors following the financial crisis mandated rules requiring they be advised in real time of their specific holdings in alternative investment vehicles. This allows them to judge what risks they are taking across their entire portfolio and ensure they are not offside on any aspect of their investment policies.

While individual investors would generally not be able to benefit from this sort of disclosure, they can benefit from the spirit of this approach by avoiding opaque investment strategies that provide investors little information about what they actually own.

There will be times that investment managers require a degree of secrecy in order to capitalize on opportunities. With this important caveat, investing in “trust me” strategies is not for first-time alternative investors.

It is not without a degree of trepidation that most investors approach alternative investments for the first time. But because these individuals are running out of suitable options in their traditional investments, they must find a way to overcome these reservations in order to benefit from the many positive characteristics that alternatives provide.