Last I talked about asset allocation was 2 days ago and the elections went underway with plenty of distractions. Now all is set and nothing can be changed for the next four years, let's get back to the fundamentals. At first we discussed about Cash and its possibilities followed by Equities and some of the options and lastly about fixed income on Part 1 of the Asset Allocation series.
A quick recap of Part 1:
1. Cash Holdings
2. Fixed Income/Debt
3. Equity/ETF
4. Alternative Investment
5. Private Equity
Today, I'm going to talk about the next two parts of the allocation which is Item 4 and Item 5 and if you briefly remember when I discussed about allocation, I also brought in the idea of investable assets and retail investors. Unless you are an accredited investor in Singapore, most likely you will not have much access to Alternative Investments and Private Equity. In many people opinion, Real Estate is also considered part of their asset allocation. I don't deny that but just that how many people have the luxury to own more than one property which is the place of residence? So, that said I would not cover that in the allocation post but perhaps in other posts that we can have a more in-depth analysis about Singapore markets, trends and the situation going forward.
Keeping Gold is something rather interesting because these days other than physical gold, we have bullion, paper gold and some other funny gold investments which may or may not turn into a scam. But during downtimes and less risky periods, gold performs best and they may be classified into a Commodity class. Commodities are moving on a downtrend for a few years now and that would be the trend but one day that trend will recover over time and another asset class will come down.
Look at this nice little Kueh Lapis model representation which i picked out from the internet almost every year different asset classes tops the chart and at some point, one goes to the bottom and eventually turning up top again over time:
Most alternative investments as the word goes are investments made up places to invest in which is not so easily accessible. One good example will be Hedge Funds but before we start let's find out on investopedia what is the definition of Hedge Funds.
As defined:
What is a "Hedge Fund"
Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Because hedge funds may have low correlations with a traditional portfolio of stocks and bonds, allocating an exposure to hedge funds can be a good diversifier.
Source: Internet
In short, just imagine a normal unit trust or technically, Mutual Funds. A hedge fund is like a mutual fund and the differences will be a mutual fund employ limited strategies but mostly to buy and hold assets and subsequently selling them off. In a hedge fund, they can go on the sell side and profit when market falls using several strategies with leverage and derivatives. Of course the risk is higher and and the returns will be potentially forecasted as higher. There were scams and bad stories about hedge funds during the GFC and even now, the hedge funds doesn't seem to outperform markets anymore. Usually such fund managers are Top traders who have a thing about first moving advantage on the capital markets and unique trading capabilities. They do have a vested interest though, when they do well for you, they take a cut of the profits and usually 15-20% on top of management fees. The top in class "Bridgewater hedge funds by Ray Dallo" are one of the best and limited capacity kind of fund managers at the top end.
Usually, investments of such are limited to privileged high net worth individuals and institutions/corporations who have much more excesses in cash. There are a few lower barrier to entry hedge funds but I'm rather skeptical when they start to raise funds from retail investors. It does make me wonder if they have an issue garnering cash from the institutes or if something is too right with their strategies.
Fret not for the retail investors, there are some interesting alternatives which you may look into but like hedge funds, these valuations are pretty much unknown and you need some person interest or passion to value them and while you do, someone else who doesn't might not see it as pricey as you do. Let's take something common like a watch for example, a Rolex, Panarai or a Hublot. For a watch enthusiast, a limited edition might be something that is worth paying a premium for but getting your hands on one would be the main issue. A watch like Panarai, which retailed a couple of hundred to a thousand USD in its early years when they manufactured tough watches to the US Marines became a collectors and piqued retail interest only after many years. Today, the watch brand has transformed itself one of the top and well known brands globally. Even if the quality and the mechanism isn't the same as what is today or during its yesteryears, watch enthusiast still would get their hands on those vintage and of course the latest models. (The time frame to double or triple your investments will be 20-40 years so that is alternative investments)
As our country become more affluent, most people tend to enjoy life more and here comes the introduction of wine tasting, whiskey tasting and recent years sake tasting. It's really a simple economic strategy of supply and demand and when you have good Mcdonalds Curry Sauce that is limited, eventually the raw materials to make it will increase in price and eventually the cost will be fully and if not partially born by consumers in a way or another. Wine has made it's way into the country for many years now. Most wine companies call it "en premier" which is wine future. Briefly, an investor or a company tried to buy wines that are age at a vintage they defined as young and then subsequently sell them off at retail or in some cases, in a Christie's or Sotheby's auction house.
Of late, art investments came into play here but most of the time it is less known. The art of appreciating ART is not something that I can define in words. After-all, it might be a tool for money laundering. But when you look back to the examples i put forward, it's all the same theory: These are unconventional investments which may lead to value in the future. Like a company stock, the potential may be unlocked one day and its scandals may lead to their self-destruction. It's something like the travel book, The roads less travelled. Majority and consensus will always deny and say no but if majority ruled the world, we would have never seen a GoPro, Facebook, Google and many more.
There are words of caution on alternatives because these are works of passion but if the conviction is high, what's there to lose to put some money into a few of those? When the stock market crashes, I doubt that a watch retail price decreases in value that quick overnight. Name a few that you might think of as an alternative investments if you thought of any.
Private Equity rings a big bell to many people and maybe some of us know it by OH YEAH, Private investments but a little more about private equity is that these investments can be so raw that they are pioneers of the company of if not, the second or third tier of shareholders. Like Alternative Investments, Private equity are not for everyone. Private Equity can be split up into Private (Which means not opened to public investments such as a listed company stock) and equity (Holding a stake in a particular business) So simply, these are private companies that may not be fully valued. These days we frequently hear the word Angel Investors and they are also called Venture Capital (Which is something like a Start-up or a Venture) The Five basic terms in Private Equity comes with:
A. Leveraged Buyout (Provide the fund raising process in order to scale the business that has potential, perhaps change the management of the company and revamp it altogether similar to a takeover process)
B. Growth Capital (Strategy includes expansion or bigger operations of the current state of a company which do not have the capital to scale further)
C. Mezzanine Capital (This is something complicated in the capital markets world and can be compared to a fixed income strategy. Basically, you get more funding and in return, you have to give back investors with a higher fixed coupon over a period of time)
D. Venture Capital (This mostly represent seed investments or start-ups investments)
E. Distressed/Special Situations (Just in case you do not know, there are firms who buys distressed debts and some of these firms re-structure them into profitable debts before selling them off again to another buyer. Sounds complicated really but in fact it's just like an equity, you buy an undervalued company, take over the management and with your networks and experience turn the company around making valuations better than it was when you first bought it and sell it off to someone else who is interested)
Source: Internet
Now this is getting heavier isn't it as it goes by. Even while I'm trying to map out the explanations in the simplest way possible, it does use up a lot of my brain juice. Investments of such comes with much higher risks and because of that, the returns usually commensurate. Unfortunately, there is again no Holy Grail so one can only use discretion to find out about a Fund Manager with track record. Even if you are George Soros, I'm certain you will never be 100% correct all the time. Interesting enough, private equity investments as it started out gained a lot of traction because there wasn't these type of allocations a few decades ago and even if they did exist, these are most likely club deals which are made while the millionaires interacted during a social event or a golf game.
Source: Internet
Naturally, financial institutions saw the gap and introduce this allocation into the services and today we it more of a Fund Format which sometimes I really wonder even if you are wealthy enough which part of the investments are you putting your money into. The kind of questions I would ask would be if this has been flipped and profited for how many times. I find the conflict of interests too strong at this area with financial institutions as they probably also own part of the Private Equity Arm or have substantial assets on them already. As the saying goes, banker always win.
I would like to end off this series by saying that though some of these investments are not what we may be able to look at it at the moment but if this does increase our awareness and finance literacy, I don't see any harm in understanding more about it. After-all my 10 year experience have taught me that many of these so called new investments, new products do re-route on similar concepts and basis. Before you even step foot into these (perhaps in 10/20 years time) to know it and grow that knowledge and experience 1-2 decade into the future do make all our us knowledgeable and better informed eventually. If you don't even start, then there's no excuse to regret it down the road. Learning as I said is a lifetime and knowledge stays with you forever.
“If you don't go after what you want, you'll never have it. If you don't ask, the answer is always no. If you don't step forward, you're always in the same place.”
-Nora Robert
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