Tag Archives: alternative investments

Are Alternative Investments really the Holy Grail of Investing?

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Amazon.ca

By Michael J. Wiener

Special to Financial Independence Hub 

Tony Robbins’ latest book, The Holy Grail of Investing, written with Christopher Zook, is a strong sales pitch for investors to move into alternative investments such as private equity, private credit, and venture capital.

I decided to give it a chance to challenge my current plans to stay out of alternative investments.  The book has some interesting parts — mainly the interviews with several alternative investment managers — but it didn’t change my mind.

The book begins with the usual disclaimers about not being intended “to serve as the basis for any financial decision” and not being a substitute for expert legal and accounting advice.  However, it also has a disclosure:

“Tony Robbins is a minority passive shareholder of CAZ Investments, an SEC registered investment advisor (RIA).  Mr. Robbins does not have an active role in the company.  However, as shareholder, Mr. Robbins and Mr. Zook have a financial incentive to promote and direct business to CAZ Investments.”

This disclosure could certainly make a reader suspect the authors’ motives for their breathless promotion of the benefits of alternative investments and their reverence for alternative investment managers.  However, I chose to ignore this and evaluate the book’s contents for myself.

The most compelling part of the pitch was that “private equity produced average annual returns of 14.28 percent over the thirty-six-year period ending in 2022.  The S&P 500 produced 9.24 percent.”  Unfortunately, the way private equity returns are calculated is misleading, as I explained in an earlier post.  The actual returns investors get is lower than these advertised returns.

Ray Dalio and uncorrelated investment strategies

The authors frequently repeat that Ray “Dalio’s approach is to utilize eight to twelve uncorrelated investment strategies.”  However, if the reported returns of alternative investments are fantasies, then their correlation values are fantasies as well.  I have no confidence as an investor that my true risk level would be as low as it appears.

Much of the rest of the authors’ descriptions of alternative investments sounds good, but there is no good reason for me to believe that I would get better returns than if I continue to own public equities.

I choose not to invest in individual stocks because I know that I’d be competing against brilliant investors working full-time.  I don’t place my money with star fund managers because I can’t predict which few managers will outperform by enough to cover their fees.  These problems look even worse to me in the alternative investment space.  I don’t lack confidence, but I try to be realistic about going up against the best in the world. Continue Reading…

TIARA: There Is a Real Alternative

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Designed Wealth Management

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

By now, you’ve likely heard the term FOMO: the Fear of Missing Out.  You’ve likely also heard the term TINA: There Is No Alternative.

Taken together, these handy little pop culture acronyms explain a good deal of what has gone on in capital markets over the past three years or so. I’d like to take this opportunity to push back a little on the second one.  Based on current valuations, there may not be a sensible alternative to stocks, bonds, and real estate, but there may well be an alternative in …. wait for it…. alternatives.

Alternative assets are varied and the term ‘alternative’ could mean different things to different people. The asset class is known on a non-correlated basis by offering opportunities in such varied assets as infrastructure, liquid alternatives, structured notes, and hedge funds.  While I personally dislike the last option due to high fees, illiquidity, and opaque reporting, depending on client objectives and risk tolerance, I believe there’s often a strong case that can be made for adding alternatives to your portfolio.  As such, here’s a new term: TIARA. It stands for: There Is A Real Alternative.  You’re not stuck with having to only choose between some combination of stocks and bonds. [Editor’s Note: John De Goey coined this term.]

A third major Asset Class

In the past half decade or so, many more traditional asset allocation strategies have changed significantly as bond yields have declined.   The asset class that has been gaining the most traction is alternatives. Continue Reading…

The Alternative Bonanza

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Photo courtesy Creative Commons/Outcome

By Noah Solomon

Special to the Financial Independence Hub

 

Over the past 20 years, there has been a propensity for both institutional and individual investors to diversify aggressively no matter what the consequences. A major part of this push has involved increasing allocations to alternative investments, ranging from hedge funds to private equity to venture capital to private debt to real estate.

In my latest commentary, I analyze both the hedge fund and private equity (PE) industries, which have been large beneficiaries of the shift into alternative investments. Specifically, I will discuss whether they have been successful in producing their intended objectives. Importantly, I recognize that there has and will always be a tremendous difference in performance between individual funds and investments and have limited my observations to generalizations on these asset classes as a whole.

Hedge Funds: from Alfred Winslow Jones to $4.8 Trillion

While writing an article for Fortune Magazine in 1948, investing pioneer Alfred Winslow Jones had the unique idea of managing the risk of holding long stock positions by selling short other stocks and using leverage to boost portfolio returns. In 1949, he raised $60,000 from four friends, added it to $40,000 of his own money, and began the first “hedge fund.” In 1952, Jones opened the fund to new investors. He also added a 20% incentive fee as compensation for himself as manager whereby he would receive 20% of any profits generated by the funds (this idea was based on the practice of Phoenician merchants who kept one-fifth of profits from successful voyages).

Hedge funds have come a long way since Jones’ time. They have been a large beneficiary of the shift into alternative assets. According to BarclayHedge, over the past 20 years ending December 31, 2021, hedge fund assets under management grew from $370 billion to $4.8 trillion.

The Emperor has No Clothes

Given the explosive growth in hedge fund assets, most people would be surprised by the investment performance of the hedge fund industry. As the following table demonstrates, on average hedge funds have neither produced attractive returns nor have they provided effective diversification from public equities.

Hedge Fund Returns: Past 20 Years Ending July 31, 2022

 

Over the past 20 years ending July 31, 2022, the HFRX hedge fund index had an annualized rate of return of 1.8%, as compared to 8.5% for the MSCI All Country World Stock Index. Moreover, the HFRX Index lagged the 3.3% annualized return for the Bloomberg Global Aggregate Bond Index while producing similar volatility.

Hedge funds have also come up short from a diversification perspective. The correlation of the HFRX index to global equities has been 78.8% while that of bonds has been only 22.9%. In other words, over the past 20 years bonds have provided both higher returns and better diversification than hedge funds.

With standard annual fees of 2% of assets and 20% of profits, hedge funds distinguish themselves more as a compensation structure than as an asset class. According to Warren Buffett, “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”

Private Equity: Not as Advertised

Another big beneficiary of the push to enhance returns and/or lower overall portfolio volatility has been the private equity industry.  Investors are told that these private equity funds produce superior returns, while providing portfolio diversification. As a result, private equity has become the hottest home for a variety of sophisticated institutions and individuals. Since 2017, investors have poured more than $1 trillion into PE funds. According to McKinsey, this amount dwarfs the amount of cash directed to venture capital, real estate funds, private debt, hedge funds and just about any other form of alternative investment.

Like hedge funds, PE firms have been hard-pressed to deliver their stated objectives. Michael Cembalest, the chairman of market and investment strategy at J.P. Morgan Asset Management, stated, “Since the financial crisis, the industry has had a tougher time outperforming public equity benchmarks.” Continue Reading…

Infrastructure as an Alternative Investment

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BMOETFs.ca

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

At a time when market volatility, rising rates and high inflation are a common denominator, investors are looking for alternative solutions that can boost returns, while diversifying their asset mix away from traditional assets and fixed income.

In 1991, an investor with a portfolio of only Canadian bonds could have earned an annualized return of ~11% over 5 years. [1] Investors have increasingly had to look to alternative assets to add diversification, for growth and income generation, and enhanced returns with more challenging market environments

Alternative investments include non-traditional assets, like real estate and infrastructure. Investors can access these types of investment through ETFs that invest in public securities to give exposure to alternative investments offering greater diversification to a portfolio.

Infrastructure defined

When focusing on infrastructure as an alternative investment, it is important to first define what infrastructure actually is. One way to think of it is that infrastructure is the essential underpinning of modern industrial societies: all the core physical structures that allow us to function and enjoy modern life. Examples of such modern physical structures are transportation (roads, bridges, railroads etc.), energy infrastructure (energy transmission lines and pipelines), telecom infrastructure (cell phone towers) etc.: the things that allow all commerce to occur across the globe.

These core assets to modern life are staples for society and you don’t see demand vary much with the economic cycle. This lends to a few key attractive characteristics that makes infrastructure good to look at from an investment perspective.

So why Infrastructure?

One of the aspects that makes Infrastructure a good hedge or offset to the cost of inflation is the nature of the underlying business. These businesses are often supported by long-term contracts with governments, municipalities, or cities. This could lead to relatively steady cash flow with a potential yield component. Another important aspect to consider is that the high barrier to entry in the marketplace which does not encourage competition to emerge easily (mostly monopolistic businesses).

In a lot of the cases, contracts are linked to inflation or the operators have the ability to pass on the inflation to the end consumers. Because of the nature of the services being provided, people aren’t going stop paying the costs associated with services and products. You can rely on income being generated. So essentially, there is baked-in inflation protection.

Continue Reading…

Fine Wine: The Alternative Asset for today’s challenges 

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By Atul Tiwari

Special to the Financial Independence Hub

The current market backdrop is making the case for alternative assets, such as fine wine, even stronger. Traditional financial asset classes have grown expensive and concentrated, and initiating or increasing an exposure to fine wine can provide important diversification and enhance potential returns.  

It is no secret that equity valuations are stretched. The massive levels of fiscal and monetary stimulus globally have propped up asset prices despite ongoing disruption from the COVID-19 pandemic. The S&P 500 price/earnings ratio exceeded 30 in mid-April, its highest level since the 1990s dotcom bubble, which did not end well for investors. With a potential economic recovery following vaccine rollouts largely priced in, prices appear to leave limited upside in the near term. 

Investors will also struggle to find attractive returns in the bond market. Even before the pandemic, yields globally were low, or even negative. Again, the downside appears to outweigh the upside as the recent selloffs in government bonds indicate.  Both fixed income and equity markets remain susceptible to a shift in the economic outlook or macro policy, which should prompt investors to consider alternative ways to diversify their portfolios.  

The increasing concentration of equity markets forms another reason why alternative assets make sense in the current backdrop. The sky-high equity returns of the past year have come overwhelmingly from the tech sector with the FAANG stocks — Facebook, Amazon, Apple, Netflix and Google (Alphabet) — significantly outperforming the wider market. Consequently, ETFs and other index-linked investments may not be as diverse as they might appear.  

This is where fine wine can help. As a real asset, fine wine prices are primarily driven by their own market dynamics, meaning they have low correlation to traditional asset classes and can help de-link an investment portfolio from swings in the wider markets.  

Fine wine’s limited and decreasing supply over time (as wine is consumed) alongside demand that goes beyond wine’s immediate benefit as a financial instrument can support wine prices regardless of the wider macro environment. Indeed, prior to the recent tech stock surge, fine wine often delivered better performance with significantly lower volatility over a range of backdrops going back to before the financial crisis.  

Healthy returns with low volatility  

Comparison of volatility and annualised return across financial assets 

 

Source: S&P, Bloomberg, Liv-ex & ishares. Data as of 31 Mar 2021  Continue Reading…