The transcript of the podcast by Nicole Ralph:
“Most people are familiar with traditional investment assets such as stock, bonds, and cash but there is a fourth asset class called “Alternative Investments” and the UK is the 2nd largest global hub of alternative investment management in the world.
Alternative investments is a very broad category that includes both traditionally regulated and non-regulated investments and can encompass a wide range of investment types and categories. There are many types of investments that fall under the umbrella description of being alternative and they are distinguished by several key traits:
- They are non-correlated to traditional equity and bond benchmarks and do not benchmark their performance against them
- They do not typically invest in traditional equity or bond assets but, if they do, they use non-traditional techniques using derivatives, leverage, or selling short
- They usually are illiquid investment or offer tight liquidity restrictions for their investors
- They use different tools and techniques than traditional managers to manage downside performance risk
- They tend to have highly specialised staff
Some common examples of alternative investments many people have heard of are Hedge Funds, Private Equity, Private Credit and Real Assets.
Hedge Funds invest in both traditional and non-traditional assets but do not try to match or outperform markets. Instead, they use advanced and sophisticated techniques to deliver positive returns under all market conditions.
Private equity managers purchase entire companies or significant minority stakes in them. They hold these positions for years while using a variety of techniques to improve the performance of the company in order to sell it later, hopefully, at a large gain.
Private credit, on the other hand is commonly known as non-bank lending. Alternative lenders loan money directly to companies, real estate and infrastructure projects. They create unique investment returns for investors by lending to companies that cannot or chose not to secure lending from traditional sources such as banks. Many of these companies are too small to access the traditional corporate bond market.
Real Asset strategies invest in physical assets such as residential and commercial real estate, infrastructure, and commodities. They tend to be long term in nature and can take a long time to produce a profit.
The main reason investors choose to use alternative investments in their portfolios is to achieve a greater level of diversification through the addition of low-correlating or non-correlating assets. In other words, the less correlation among asset types in a portfolio produces a lower standard deviation of the total portfolio. Standard deviation is a number used to tell how measurements for a group are spread out from the average or expected value. In the case of investments, the expected value is the average rate of return an investor expects to achieve on her total portfolio. Low standard deviation means that most of the returns achieve cluster closely around the average. High deviation returns means that the returns achieved are spread out.
Adding alternative investments to a portfolio lowers the standard deviation and increases the possibility of achieving a consistent level of return on a portfolio over time. Institutional investors, especially very large pension funds, have always held a range of positions in alternative investments for this exact reason. Savvy and high net worth investors seek out appropriate alternative investments for the very same reasons. For the high net worth investor, lowering standard deviation makes financial planning easier because if you know you’re very likely to achieve a consistent 7% rate of return, you can use that number to plan your retirement income with more certainty and therefore confidence.
At Avantis, our main business is sourcing private credit opportunities for our network of sophisticated and high net worth investors. We connect and introduce our clients to small companies, mostly in the real estate industry, who are seeking capital to develop residential and commercial properties and special projects. The vast majority of our private credit opportunities are located in the UK, which makes sense because, as I mentioned earlier, the UK is the 2nd largest global hub of alternative investment management but, because of the UK’s position in the global arena, we sometimes come across private credit opportunities for projects and development overseas and we also share those with our clients.
Sometimes we source private credit opportunities that look more like hedge funds or real asset strategies. In all cases, our due diligence team will be looking for a way for the small company that’s seeking the funding to employ active risk management by securing specific assets from their balance sheet against capital raises so our network of investors can recoup some or all of their money if the project doesn’t go as planned.
Many of our clients are familiar with direct real estate investments as either a professional or from making savvy personal choices on residential property over the last decade or two and fully grasp the commercials behind our the deals we offer. However, most haven’t really understood how the powerful combination of lower correlation and the potential for outperformance alternative investments can offer them by maintain a permanent allocation to this asset class. Let our team of professionals discuss how alternative assets can work for you.
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