Alternative investment

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A British 1 shilling embossed stamp, typical of the type included in an investment portfolio of stamps. Embossedgreenshilling1847scott5die2.jpg
A British 1 shilling embossed stamp, typical of the type included in an investment portfolio of stamps.

An alternative investment, also known as an alternative asset or alternative investment fund (AIF), [1] is an investment in any asset class excluding capital stocks, bonds, and cash. [2] The term is a relatively loose one and includes tangible assets such as precious metals, [3] collectibles (art, [4] wine, antiques, vintage cars, coins, watches, musical instruments, or stamps [5] ) and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, exchange funds, carbon credits, [6] venture capital, film production, [7] financial derivatives, cryptocurrencies, non-fungible tokens, and Tax Receivable Agreements. [8] Investments in real estate, forestry and shipping are also often termed "alternative" despite the ancient use of such real assets to enhance and preserve wealth. [9] Alternative investments are to be contrasted with traditional investments.

Contents

Research

As the definition of alternative investments is broad, data and research vary widely across the investment classes. For example, art and wine investments may lack high-quality data. [10] The Goizueta Business School at Emory University has established the Emory Center for Alternative Investments to provide research and a forum for discussion regarding private equity, hedge fund, and venture capital investments.

Access to alternative investments

In recent years, the growth of alternative finance has opened up new avenues to investing in alternatives such as the following:

Art

In a 1986 paper, William Baumol used the repeat sale method and compared prices of 500 paintings sold over 410 years before concluding that the average real annual return on art was 0.55%. [11] Another study of high-quality oil paintings sold in Sweden between 1985 and 2016 determined the average return to be 0.6% annually. [12] [13] However, art gallerists are sometimes ambivalent to the idea of treating artwork as an investment. [14] Art is also notoriously difficult to value, and there are quite a few factors to bear in mind for art valuation.

Equity crowdfunding

Equity crowdfunding platforms allow "the crowd" to review early-stage investment opportunities presented by entrepreneurs and take an equity stake in the business. Typically an online platform acts as a broker between investors and founders. These platforms differ greatly in the types of opportunities they will offer up to investors, how much due diligence is performed, degree of investor protections available, minimum investment size and so on. Equity crowdfunding platforms have seen a significant amount of success in the UK and, with the passing of JOBS Act Title III in early 2016, are now picking up steam in the United States.

Infrastructure as an asset class

The notion of “infrastructure as an asset class” has grown steadily in the past seven years. [15] [16] But, so far, this development has been the preserve of institutional investors: pension funds, insurance companies and sovereign wealth funds, with very limited access to high-net-worth investors (except a few large family offices).

SEIS and EIS funds

Only available in the UK, SEIS funds and EIS funds present a tax-efficient way of investing in early-stage ventures. These work much like venture capital funds, with the added bonus of receiving government tax incentives for investing and loss relief protection should the companies invested in fail. Such funds help to diversify investor exposure by investing in multiple early ventures. Fees are normally charged by the management team for participating in the fund, and these can end up totaling anywhere between 15% and 40% of the fund value over the course of its life.

Lease investing

Lease investing platforms provide investors with options to co-invest and have partial ownership in physical assets that earn lease income. Through these platforms, investors can have fractional ownership of a particular asset leased to an organization and earn fixed returns.

Private equity

Private equity consists of large-scale private investments into unlisted companies in return for equity. Private funds are typically formed by combining funds from institutional investors such as high-net-worth individuals, insurance companies, university endowment funds and pension funds. Funds are used alongside borrowed money and the money of the private equity firm itself to invest in businesses they believe to have high growth potential. [17]

Venture capital

Venture capital consists of private investments made into young start-up companies in exchange for equity. Venture capital funds are typically formed by drawing capital from seed money, or angel investors. Nowadays, crowdfunding is also used by start-up companies for capital. Accredited investors such as high-net worth individuals, banks, and other companies will also invest in a start-up company if it grows to a large enough scale.

Investors

The 2003 Capgemini World Wealth Report, based on 2002 data, showed high-net-worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". [18] By 2007, this had reduced to 9%. [19] No recommendations were made in either report about the amount of money investors should place in alternative investments. As of 2019, the global breakdown of financial assets included a 13% allocation to alternative investments. [20]

A Good Delivery bar, the standard for trade in the major international gold markets. Gold bullion 2.jpg
A Good Delivery bar, the standard for trade in the major international gold markets.

Characteristics

Alternative investments are sometimes used as a way of reducing overall investment risk through diversification.

Some of the characteristics of alternative investments may include:

Industry

Alternatives may be offered by traditional investment companies or specialized companies. Among companies which specialize in alternative investments, some offer a variety of strategies others offer only a specific type.

In 2023, Blackstone, which specializes in only alternative investments including private equity, private debt, real assets, hedge funds, and hedge funds of funds, became the first alternative investment manager to reach $1 trillion in assets under management (AUM). [22] Other notable alternative asset managers include Apollo, Brookfield, KKR, and Carlyle, each of which have hundreds of billions in AUM. [22]

As of 2023, traditional asset management companies had begun to offer alternatives including BlackRock, T. Rowe Price, and Franklin Templeton Investments. [23]

Liquid alternatives

Liquid alternatives ("alts") are alternative investments that provide daily liquidity.[ example needed ] Liquid alternative investments should[ according to whom? ] produce returns uncorrelated to GDP growth, must have protection against systemic market risk and should be too small to create new systemic risks for the market. [24] Hedge funds may be included in this category; however, traditional hedge funds may have liquidity limitations, and the term is usually used for registered mutual funds which use hedge fund strategies such as long-short equity investments. [25]

United States

Liquid alternatives became popular in the late 2000s, growing from $124 billion in assets under management 2010 to $310 billion in 2014. [26] However, in 2015 only $85 million was added, with 31 closed funds and a high-profile underperformance by the largest long-short equity fund at the time, Marketfield Fund. [26]

In 2014 there were an estimated 298 liquid alternative funds with strategies such as long-short equity funds; event-driven, relative value, tactical trading (including managed futures), and multi-strategy. This number does not include option income funds, tactical shorting and leveraged indexed funds. [25]

There has been expressed skepticism over the complexity of liquid alts and the lack of able portfolio managers. [27] One of the world's largest hedge fund managers, AQR Capital, began offering funds in 2009, [28] and grew from $33 billion in assets under management (AUM) in 2010 to $185 billion in AUM in 2017 driven in part by marketing mutual-fund like products with lower fees. [29] As of 2016, AQR Capital was the largest manager of liquid alts. [30]

See also

Related Research Articles

A hedge fund is a pooled investment fund that holds liquid assets and that makes use of complex trading and risk management techniques to improve investment performance and insulate returns from market risk. Among these portfolio techniques are short selling and the use of leverage and derivative instruments. In the United States, financial regulations require that hedge funds be marketed only to institutional investors and high-net-worth individuals.

In the field of finance, private equity (PE) is capital stock in a private company that does not offer stock to the general public. Private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, "private equity" can refer to these investment firms rather than the companies that they invest in.

<span class="mw-page-title-main">D. E. Shaw & Co.</span> U.S.-based investment management firm

D. E. Shaw & Co., L.P. is a multinational investment management firm founded in 1988 by David E. Shaw and based in New York City. The company is known for developing complicated mathematical models and computer programs to exploit anomalies in financial markets. As of December 1, 2023, D. E. Shaw has $60 billion in AUM, including alternative investments and long strategies.

A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment. A fund of funds may be "fettered", meaning that it invests only in funds managed by the same investment company, or "unfettered", meaning that it can invest in external funds run by other managers.

In finance, assets under management (AUM), sometimes called fund under management, measures the total market value of all the financial assets which an individual or financial institution—such as a mutual fund, venture capital firm, or depository institution—or a decentralized network protocol controls, typically on behalf of a client. Funds may be managed for clients, platform users, or solely for themselves, such as in the case of a financial institution which has mutual funds or holds its own venture capital. The definition and formula for calculating AUM may differ from one entity to another.

A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years. At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. From the investors' point of view, funds can be traditional or asymmetric.

<span class="mw-page-title-main">Wellington Management Company</span> American investment management firm

Wellington Management Company is a private, independent investment management firm with client assets under management totaling over US$1 trillion based in Boston, Massachusetts, United States.

In finance, the private-equity secondary market refers to the buying and selling of pre-existing investor commitments to private-equity and other alternative investment funds. Given the absence of established trading markets for these interests, the transfer of interests in private-equity funds as well as hedge funds can be more complex and labor-intensive.

A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital. Often described as a financial sponsor, each firm will raise funds that will be invested in accordance with one or more specific investment strategies.

Lexington Partners is one of the largest manager of secondary acquisition and co-Investment funds in the world, founded in 1994. Lexington manages approximately $55 billion of which an unprecedented $14 billion was committed to the firm's ninth fund, the largest dedicated secondaries pool of capital ever raised at the time.

A private placement agent or placement agent is a firm assisting fund managers in the alternative asset class and entrepreneurs/private companies seeking to raise private financing through a so-called private placement.

Preqin Ltd. is a privately held London-based investment data company that provides financial data and insight on the alternative assets market, as well as tools to support investment in alternatives. By the company's own definition, its data encompasses private capital and hedge funds, including fund, fund manager, investor, performance and deal information. The asset classes it covers are: private equity, venture capital, hedge funds, private debt, real estate, infrastructure, natural resources and secondaries.

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.

<span class="mw-page-title-main">Amundi</span> French asset management firm

Amundi is a French asset management company. With €2 trillion of assets under management (AUM) at the end of 2021, it is the largest asset manager in Europe and one of the 10 biggest investment managers in the world.

<span class="mw-page-title-main">AQR Capital</span> Global investment management firm

AQR Capital Management is a global investment management firm based in Greenwich, Connecticut, United States. The firm, which was founded in 1998 by Cliff Asness, David Kabiller, John Liew, and Robert Krail, offers a variety of quantitatively driven alternative and traditional investment vehicles to both institutional clients and financial advisors. The firm is primarily owned by its founders and principals. AQR has additional offices in Boston, Chicago, Los Angeles, Bangalore, Hong Kong, London, Sydney, and Tokyo.

Clifford Scott Asness is an American hedge fund manager and the co-founder of AQR Capital Management. According to an April 2020 Forbes profile, Asness' estimated net worth was $2.6 billion.

Affiliated Managers Group, Inc. (AMG) is an American financial services firm founded in 1993 and headquartered in West Palm Beach, Florida. The company's stock trades on the New York Stock Exchange under the symbol AMG, and is listed on the S&P 400 for mid-size American firms.

Axa Investment Managers is a global investment management firm. It operates as the investment arm for Axa, a global insurance and reinsurance company.

<span class="mw-page-title-main">Fiera Capital</span> Canada asset management company

Fiera Capital Corporation (Fiera) is a Canadian asset management company headquartered in Montreal, Quebec. The company has expanded through a series of acquisitions. It invests in multiple asset classes which are in both public and private markets although the majority of its assets are in public markets. North America is its biggest region with the majority of its investments being in Canada and the United States.

References

  1. ↑ "Scope - Definition of AIF - AIFMD". Linklaters. 31 January 2017. Retrieved 1 October 2022.
  2. ↑ "Alternative Investment" . Retrieved 13 February 2021.
  3. ↑ Investing, Intelligent. "Five Alternative Investments To Protect Your Wealth From Inflation". Forbes . Retrieved 7 January 2017.
  4. ↑ Coslor, Erica; Spaenjers, Christophe (2016). "Organizational and epistemic change: The growth of the art investment field". Accounting, Organizations and Society. 55: 48–62. doi:10.1016/j.aos.2016.09.003. hdl: 11343/119743 .
  5. ↑ Greenwood, John (6 October 2008). "First class returns for alternative investments" . Retrieved 7 January 2017.
  6. ↑ "FAQs - The Gold Standard" . Retrieved 7 January 2017.
  7. ↑ Schwartz, Shelly (18 October 2010). "Investing In The Big Screen Can Be A Profitable Story". CNBC. Archived from the original on 12 June 2011. Retrieved 29 October 2011.
  8. ↑ "Tax Receivable Agreements | Parallaxes Capital | Alternative Assets". Parallaxes Capital | Experts in Tax Receivable Agreements. Retrieved 17 May 2022.
  9. ↑ "Invest in a forest". 24 August 2007. Retrieved 7 January 2017.
  10. ↑ "Alternative Investments - What is the best way to invest money?" . Retrieved 7 January 2017.
  11. ↑ Baumol, William (May 1986). "Unnatural Value: Or Art Investment as Floating Crap Game". The American Economic Review. 76 (2): 10–14. JSTOR   1818726.
  12. ↑ Kundu, Dennis; Raza, Alexander (2016). "What drives the value of art?". Stockholm School of Economics.
  13. ↑ Modig, Karolina (4 February 2017). "Ny svensk studie: Konst en dålig investering". Svenska Dagbladet (in Swedish).
  14. ↑ E, Coslor (1 January 2010). "HOSTILE WORLDS AND QUESTIONABLE SPECULATION: RECOGNIZING THE PLURALITY OF VIEWS ABOUT ART AND THE MARKET". Economic Action in Theory and Practice: Anthropological Investigations. Research in Economic Anthropology. Vol. 30. pp. 209–224. doi:10.1108/S0190-1281(2010)0000030012. hdl:11343/59437. ISBN   978-0-85724-117-7. S2CID   187187796.
  15. ↑ WPC Conference Committee (9 February 2012). "Infrastructure As A New Asset Class for Pensions and SWFs" (PDF). 2nd Annual World Pensions Forum, Roundtable led by Arbejdsmarkedets TillægsPension (ATP), Denmark’s National Supplementary Pension. Retrieved 17 August 2017.
  16. ↑ Firzli, M. Nicolas J. (24 May 2016). "Pension Investment in infrastructure Debt: A New Source of Capital for Project Finance". World Bank (Infrastructure and PPPs Blog). Washington, DC. Retrieved 9 August 2017.
  17. ↑ Barber, Felix; Goold, Michael (1 September 2007). "The Strategic Secret of Private Equity". Harvard Business Review. ISSN   0017-8012 . Retrieved 18 May 2022.
  18. ↑ "World Wealth Report 2003" (PDF). Merrill Lynch/Cap Gemini Ernst & Young. p. 12. Archived from the original (PDF) on 24 May 2010. Retrieved 28 March 2010.
  19. ↑ "World Wealth Report 2008" (PDF). Cap Gemini Merrill Lynch. p. 14. Archived from the original (PDF) on 24 December 2010. Retrieved 28 March 2010.
  20. ↑ "with a loss of 2 trillion USD, High Net Worth Individual wealth declines after seven consecutive years of growth but HNWI's trust and satisfaction in wealth managers and firms remain high". Capgemini US. 9 July 2019. Retrieved 18 May 2022.
  21. ↑ "Introduction to Alternative Investments".{{cite journal}}: Cite journal requires |journal= (help)
  22. 1 2 "Blackstone Is the First Alternative Asset Manager to Hit $1 Trillion AUM. So Where Does It Go From Here?". Morningstar, Inc. 21 August 2023. Retrieved 2 September 2023.
  23. ↑ "Blackstone Is the First Alternative Asset Manager to Hit $1 Trillion AUM. So Where Does It Go From Here?". Morningstar, Inc. 21 August 2023. Retrieved 2 September 2023.
  24. ↑ "The Definition of A Liquid Alternative". Advent Alternatives. Archived from the original on 19 January 2015. Retrieved 7 January 2017.
  25. 1 2 "Drowning in Liquid Alts | IMPACT 2014 content from WealthManagement.com". 30 March 2015. Archived from the original on 30 March 2015. Retrieved 16 June 2016.
  26. 1 2 Krouse, Sarah (31 December 2015). "The Year the Hedge-Fund Model Stalled on Main Street". Wall Street Journal. ISSN   0099-9660 . Retrieved 16 June 2016.
  27. ↑ Benjamin, Jeff. "As liquid-alt mutual funds proliferate, some question their value" . Retrieved 7 January 2017.
  28. ↑ "AQR hedging its bets with big mutual fund plan". Reuters. 24 June 2009. Retrieved 15 October 2017.
  29. ↑ Vardi, Nathan. "Inside The Booming Financials Of Billionaire Cliff Asness' AQR Capital Management". Forbes. Retrieved 15 October 2017.
  30. ↑ Smith, Randall (15 September 2016). "Investors Stick With Assets That Mimic Hedge Funds". New York Times. ISSN   0362-4331 . Retrieved 15 October 2017.

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