Private equity, gold, art... there are many assets. But besides being risky, they lack liquidity. Choose with care
Alternate or alternative investments are the name commonly used for non-traditional investment avenues. The traditional asset classes are debt and equity. They are also called primary asset classes, as they are directly linked to entrepreneurship, the human effort to mobilise capital.
These assets do have some peculiarities which are reflected in their risk-return profile. For one, they are less liquid. Two, they are riskier. And, hence, have the potential to give higher returns, too.
There are three variants of any investment strategy for generation of optimum returns. First, directional,which take advantage of the price changes; then, cash flows; and lastly arbitrage strategies. In traditional assets, directional strategies are important. In alternate assets, the latter two are more important.
PRIVATE EQUITY (PE)
PE funds may be of broadly two types -- sector-agnostic or sector specific. While the former have a broad portfolio, sector-biased funds will cover one or a few sectors only. These investments may be in sectors that promise good growth over the coming years.
In PE, investment should be attempted only if funds are available for long periods. Most of these funds run for five-six years and the gestation period for returns generation is relatively long. Most of the time funds go into ventures which require financial support and are in an early stage of their development or expansion. Therefore, the probability of such ventures going bust is also a possibility.
Returns depend on expertise and experience of the fund management team.
STRUCTURED PRODUCTS
Structured products generally combine more than one asset class. A very popular form of structured products is an in-built or inherent capital protection. One needs to be very clear that there is no capital guarantee but only capital protection. Say, if the fund takes 100 from the investor for two or three years, and then deploys 90 in coupon-bearing fixed income or debt instruments and earns the accruals year by year, which makes the `90 into `100 over the balance number of years. The rest of the money, that is,
`10 is deployed in futures and options or commodities and it is traded around. This, if done well, will add to the returns the investor would be getting on the fixed income component. But many of these underlying techniques are difficult for common investors to understand.
GOLD
A number of things like commodities, antiques, rare wines, coins and so on also fall within the definition of alternate assets. Most prominent in this space is gold, that has attracted a lot of investors through exchangetraded funds. In the present circumstances, it would be a useful idea to keep some gold in the portfolio.
ART FUNDS
These became popular only in the last decade. However, these are not well regulated. Many purchased paintings and works of art and dumped them in god owns, without showing to anyone. The logic being that the price of the painting would go down if seen. Another issue is determining the value of the art. It is better to stick to art by buying paintings at exhibitions. However, this asset is most illiquid.
ALLOCATION
Since these avenues carry a high level of risk in some cases and alower level of liquidity, investors should not have an allocation of more than 15-20 per cent in the overall portfolio. If this part of the allocation is done properly, under the advice of a proficient advisor, you may be able to get that extra return out of it, like icing on a cake.
