Alternative assets and you

Background

Over the years the investing public has been exposed to two main asset types, namely stocks and fixed income instruments such as bonds. These instruments are usually publicly traded through vehicles such as the Jamaica Stock Exchange and international capital markets however there are more investment options outside of these traditional types which are collectively referred to as alternative assets.

Overview of alternatives

Alternative assets include hedge funds, investments in private businesses referred to as private equity, real estate and even range as far as investing in art and wine as assets. Modern portfolio theory makes a solid case for the importance of having greater allocation toward alternative assets because of the risk protection through diversification and the ability to generate higher returns. Public markets usually have jittery investors that are obsessed with short term results and deploying capital this way can make returns more volatile.

Alternative assets usually require a more long term, patient approach because of the lack of liquidity in the asset class. In other words, because there is less trading of alternative assets, the invested funds are tied up for a longer period of time. However, a wisely chosen alternative asset is known to beat the average returns on stocks. This reward for investor patience is called an “illiquidity premium” and comes with an element of notable risk. On the flipside, when the stock market goes through a decline, alternative assets continue to provide significant returns for savvy investors while those who are only allocated to public assets suffer from the decline.

Alternative assets are more popular among institutional investors such as insurance companies, pension managers, wealthy families and individuals who have a high level of financial savvy. The range and depth of variety in alternative assets is dependent on the maturity of the financial market of a particular region. For instance there are more hedge funds in Europe than in the Caribbean but private equity opportunities in developing markets including the Caribbean could produce higher yields than in the more mature and developed European markets. Interestingly, there are both local and international publicly listed firms that invest in alternative assets such as Blackstone Group, KKR, Proven and Pan Jam Investments.

Final thoughts

Alternative assets are becoming more mainstream as investors continue to seek more high quality opportunities to generate meaningful risk adjusted returns on investments. It is said that alternative investments are the future but like all other investments, they require careful study and the assistance of licensed, skilled investment professionals to keep the perils of loss at bay.

By Julian Morrison

Julian is an Investment Advisor at the JMMB Group with experience in Insurance, Banking and Economics. He holds a Wealth Management and Financial planning certificate and another in Mergers and Acquisitions from the Jamaica Stock Exchange. Julian is also a member of the Jamaica Chamber of Commerce and takes a special interest in the development of Micro, Small and Medium Sized Enterprises (MSMEs) in the Caribbean.