• Thursday, March 28, 2024
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FBNQuest outlines four reasons alternative investment is relevant

Three investment principles to note when considering short-term instruments

Diversification is a critical consideration when building a portfolio as it helps to spread risk across various assets whilst ensuring that financial goals are attainable, according to research analysts at FBNQuest.

As a result, the asset management arm of FBN Holdings said it is always advisable to have a balanced mix of traditional and alternative investments in any given portfolio.

“Traditional investments include stocks, bonds, and cash. Any other financial asset that does not fall under the conventional investment definition is classified as an alternative investment. Examples include real estate, private equity, venture capital, infrastructure, distressed securities, hedge funds and collectables such as artwork, antiques, vintage wines, stamps, and several others. Alternative Investments have a low correlation with traditional asset classes, making them suitable for portfolio diversification. Investments are generally long-term, close-ended, and unlisted,” it said.

While alternative investments have been around for decades, the volatile money market returns coupled with evolving attitudes towards wealth building and the emergence of an innovation culture have generated interest in alternative investment strategies in recent years.

“We have seen an increase in investors embracing unconventional strategies such as crowdfunding schemes, cryptocurrencies, and early-stage venture capital. Given this demand and the increasing flight for yield, the market has seen a rise in alternative investment product offerings globally,” FBNQuest’s analysts said.

According to a recent McKinsey & Company report, the current surge in alternative investments is only the beginning of a new wave of growth. The report states that institutional investors are exploring new paths and increasing their allocations to alternative investments. It also suggests that alternative investments are increasingly becoming mainstream.

Read also: Managing your Health: Keeping Your Cholesterol Under Control- FBNQuest

There are several reasons why alternative investments are rising in relevance to investors. A few of them cited by FBNQuest include:

Potential for Higher Returns

Many alternative investments offer more attractive returns than traditional investments. Given the active management involved in some alternative asset classes, as well as the long-term holding periods, there is a likelihood of generating superior returns. Also, the illiquid nature of the asset class commands a premium over traditional investments.

Diversification Benefits

Most alternative investments, according to the asset management company, are high-risk investments; however, they provide strong diversification benefits. “Given the low correlation of returns with traditional investments, the inclusion of alternative investments in a portfolio provides great diversification potential by spreading risk across multiple assets.”

Reduced exposure to volatility

Investors are exposed to reduced volatility given the low correlation with traditional asset classes. This provides portfolio stability in the long-term, it said.

Access to Unique Investment Opportunities

Alternative Investments, according to the research analysts, provide investors with a variety of options that are not readily available in other asset classes. “The asset class also comprises the vast majority of investable options in the marketplace. For example, broadly speaking, most unlisted, privately-held businesses are potential opportunities.”