IN the world of serious portfolio investing, the BIG 3 asset classes are equities, fixed income and cash. There are also two outlier asset types: investment real estate and alternative investments, or alts, which round off the full set of five asset classes the world’s savviest investors use to construct their wealth accumulation vessels.
In recent weeks, I have written on the roles of cash, fixed income, equities and investment real estate within a portfolio. Today, we complete our set by looking at alts.
Alts is a convenient catch-all category for six asset segments or asset subclasses used by wealthy investors to a modest extent. According to the 2016 World Wealth Report (2016 WWR) published by Capgemini in late June, earlier this year, the world’s wealthiest people sank 15.7 per cent of their investment wealth in alts. The alts asset class comprises half a dozen asset segments — hedge funds, structured products, private equity, derivatives, foreign currency and commodities.
Despite being very different from one another, the six asset segments have one striking similarity: they have low correlations with the other four more widely-used asset classes — cash, fixed income, equities and investment real estate. (Note: Low and ideally negative correlations mean the prices of different assets do not move in tandem.)
Here is a rundown of the six segments comprising alts:
HEDGE funds are absolute return investment vehicles that attempt to generate positive nominal returns in all investment environments by taking both long (buy first, then sell) and short (sell first, then buy) investment positions. They are often deemed high risk and are not readily available in Malaysia. Purveyors of hedge funds, though, abound in more sophisticated financial centres, including Singapore and Hong Kong.
STRUCTURED products are hybrid offerings comprising a primary investment like a zero coupon bond and a riskier growth investment, such as a derivative (see derivatives below for an explanation), which can tie up capital for several years, namely the structured term or tenure. (My biggest complaint about structured products is not with their risk, but with the irritating, frustrating, widespread incorrect use of the word “tenor” for “tenure” (see www.usingenglish.com/forum/threads/27292-Tenor-vs-Tenure).
My linguistic pedantry aside, structured products can be far riskier than numerous naive retail investors are led to believe. They come in two flavours: structured deposits, which are relatively safer than their racier, riskier cousins, structured investments.
PRIVATE EQUITY are ownership stakes in private companies that are not (yet) listed on a stock exchange. Such stakes can be ideal wealth generators for sophisticated investors, who have both deep know-how and vast financial muscle. They require the know-how to assess the long-term prospects of various private companies and the muscle to invest in several private equity positions to spread their risk and raise the likelihood of enjoying at least one or two gushers within their extensive set of private ownership positions.
DERIVATIVES are securities that are essentially gambles. The fluctuating price of a derivative is based on (or literally “derived” from) the intermediate price movements of an underlying asset, such as a stock or index (like the KLCI or S&P 500) or a commodity. Each derivative is a contract between two or more parties. The contract’s settlement value hinges on the price of the primary underlying asset.
FOREIGN currency. As Malaysians, our base currency is the ringgit. Since ours is a minor currency within the global scheme of things, sophisticated investors sometimes take long positions in currencies they think will strengthen and short positions in currencies they suspect will weaken. The foreign currency or foreign exchange (forex) market is the world’s largest! Worldwide, the most traded currencies are the greenback, or US dollars, the euro, yen, British pound and Swiss franc.
COMMODITIES are real, tangible assets. In Scott Frush’s book Commodities Demystified, he explains: “Commodities... represent the food we eat, the fuel we use to power our automobiles, the metal we utili(s)e to make (jewellery) and the lumber we use to build our homes. Without commodities, our civili(s)ation would not exist today.” - NST
No comments:
Post a Comment