In bull markets, investors tend to focus on equities and the potential for long-term capital growth and an increase in income. When markets turn downwards, or there is a degree of volatility and uncertainty, non-traditional investments, known as alternative investments, will often come into play. They offer a different angle and investment strategy; in some cases, they can provide a degree of protection.
While it is understandable that investors focus on long-term capital growth, long-term investment is as much about protecting your capital as it is growing it. We will now look at private equity, hedge funds, real estate, and cryptocurrencies, which are viable options if you are looking for long-term, steady growth.
Real estate assets
Looking at the broader real estate sector, investors can position their portfolio to provide long-term steady income streams, the potential for capital appreciation and, perhaps more importantly, a hedge against inflation. Two main areas of interest are Real Estate Investment Trusts (REITs) and infrastructure funds.
REITs provide a degree of diversification across a range of property assets, which would be difficult for the typical investor to replicate. On the flip side, infrastructure funds provide funding for critical infrastructure projects such as roads, airports and utilities, often providing robust and predictable cash flows.
Private equity investments
Recently, investors in the Far East have been looking towards private equity investments as many believe they offer better value than traditional markets. Private equity funds have significant freedom to invest across a wide range of different scenarios. For example, there is currently a strong appetite for debt funding within private equity circles as commercial banks look to reduce their exposure to challenging economies. While there is obviously a degree of risk, as these loans are secured against assets, this is significantly reduced.
Private equity managers also have access to cutting-edge portfolio management software, which allows them to identify investments and optimise returns. Whether looking at a personal private equity portfolio or investing in a wider fund, it is possible to align this with your investment strategy and attitude to risk.
Hedge funds
As soon as investors see the word "hedge fund", many they switch off, concerned about what are often deemed to be high-risk investments. Yes, many hedge funds will look towards more volatile markets, securing returns from mispricing and arbitrage situations, but this is not always the case. Investment strategies are varied, taking in long and short-term equity investments and using options and futures to create synthetic positions.
This tends to be more of a specialised field, and there is often a minimum investment, potentially high fees and less regulatory oversight. Focus tends to be on the hedge fund managers and their history, emphasising the need to research before investing.
Cryptocurrencies
Those who follow the cryptocurrency market will be aware that the SEC recently approved the introduction of spot price Bitcoin ETFs with as many as 20 products awaiting approval. Standard Chartered Bank forecasts that Bitcoin will hit $100,000 in 2024, which has got the sector back in the headlines. While this would represent a significant return from current levels, it's also essential to recognise the volatility, relatively high risk, and lack of a standard regulatory framework for crypto assets.
Ironically, Hong Kong has become something of a magnet for crypto asset companies, with the authorities in the process of creating a welcoming but protective regulatory structure. Many believe that the Far East will become the focal point of crypto asset trading, such as Bitcoin, although recent regulatory clearance in the US suggests there may be challengers.
Summary
When looking at alternative investments, the correlation with equity markets tends to be minimal or, in some cases, non-existent. This is the main concept of alternative investments, finding ways to protect assets within a wider diversification strategy. There also tends to be lighter regulation regarding alternative investments compared to the more traditional equity markets.
Often a valuable foil for tax reduction schemes, it's essential to research alternative investments in depth before committing your funds.