In today´s finance world there is another category of investment apart from the three traditional asset types (stocks, bonds and cash): Alternative Investments, which includes private real estate, publicly traded real estate securities, private equity, hedge funds and commodities.
So, in this article let´s take a look at alternative investments because are sometimes used as a tool to reduce overall investment risk through diversification.
These assets are held by institutional investors or high-net-worth individuals because of their characteristics like the lower correlation with traditional financial investments such as stocks and bonds, its complex nature, the limited regulations and historical risk and return data and the lack of liquidity.
The Industry Today
While total assets in hedge funds surpassed USD3 trillion for the first time on record in May 2014, according to a report from eVestment, the total assets managed by the top 100 alternative investment managers [pension fund assets represent a third, wealth managers (18%), insurance companies (9%), sovereign wealth funds (6%), banks (3%), funds of funds (3%), and endowments and foundations (3%)] globally reached $3.3 trillion in 2013 ($3.1 trillion in 2012), according to research produced by Towers Watson (TW), in conjunction with the Financial Times.
The ranking by share of assets held in each category is:
- real estate managers (over $1 trillion)
- private equity fund managers ($753 billion)
- hedge funds ($724 billion)
- private equity funds of funds (PEFoFs) ($322 billion)
- funds of hedge funds (FoHFs) ($173 billion)
The total asset under management is now $5.7 trillion and is divided between the asset classes in similar proportions to the top 100 alternative investment managers. The only exceptions are real estate, which falls to 24%, and hedge funds, which increases to 27% of the total. As well as hedge funds, illiquid credit and commodities are increasing their portions in the portfolios.
Alternative investments look particularly attractive for a diversifier investor. Although the costs of purchase and sale may be relatively high and a high degree of investment analysis may be required before buying because it may be difficult to determine the current market value of the asset, they can give you access to unique opportunities to grow your wealth, varying from real estate to hedge funds and private equity solutions.
We think allocations to alternatives investments will continue to increase. Today, managers no longer viewed alternative asset classes as alternatives investments; instead they view them just as different ways of accessing to long-term investment and risk premium, and to make greater use of them.
Disclosure: Omar Venerio holds no position in any stocks mentioned.