The future in alternatives – Hedge Funds

Most entrepreneurs prefer to put all the earned money into their business. It was rare for companies to invest elsewhere. However, as individual investors earn more and get wealthier, they must buy in trusted asset classes, ensuring value after many years of investments. 

Such investment provides a backup in case of a recession or market loss. Most long-term stock investors have disregarded such alternatives, but putting all the money in one pocket can be too risky, creating the need for additional options diversification.  

Institutional investors identified the potential of non-liquid alternatives in 2000. Now, after 20 years, the trend continues to grow in new areas where the investors recognize alternative mechanisms to earn where some innovative categories of such assets are environmentally friendly ethical options that contribute to the growth of society. 

One of the first such models was the Yale Model, adopted by many institutional high-net-worth investors that combined several instruments and managed diversification to deliver long-term stable returns with a low correlation to markets or the mainstream asset classes. This is the key strategy where the investors swap liquidity for higher returns. 

Many categories offer diversification within diversification, such as real estate, which can be classified into different regions, cities, commercial, non-commercial, warehouses, and land.  

• The superior investments are the ones with high calibre quality at lower production costs. 

• Some funds offer new categories to provide a meaningful comparison between different types of funds. 

•  Most such areas offer innovative investment ideas but can spread the risk across geographies and sectors. 

Institutions Diversifying Pension Funds 

As per Fitch Ratings, the average pension investment tripled in such categories. In 2007, on average, 9 per cent of the local public and state pension was invested in the sector, and by 2017, the investment increased to 27 per cent. 

The report suggests that before 2008, almost 70 per cent of the Maryland system portfolio was invested in stocks. Now, it is less than 50 per cent where the investments increased in real estate, hedge funds, and private equity. 

The investments showing growth in the current market include wine and art, which are alternative asset classes, uncorrelated to the equity market, and attractive to people looking for a hedge against volatility and market downturns. 

Study finds from 2012 to 2017, the best-performing luxury asset class was fine wine, with an average gain of 150 per cent. One of the key assets, Petite Mouton 2011, reported a growth of 165 per cent. 

In 2017, the Knight Frank Luxury Investment found art performed better than wine, and the trend continued in the next years, where the annual growth reported by the category was 25 per cent in the first six months.  

The 2018 figures show that the average price of Old Masters improved significantly, while contemporary art depicted a decline.