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Although one cannot predict the future, it doesn’t take much to forecast a challenging year for investors. Risks abound from persistent inflation, increasing interest rates, geo-political turmoil, an unstable energy market, and the World Bank’s prediction of a global recession. These factors weighed heavily on traditional assets (stocks, bonds, cash) during 2022 and in many analysts’ eyes, the pain isn’t over.
This drastic change in market dynamics has forced investors into a major rethink. After ten years of record low-interest rates and ever-increasing stock prices, we’re faced with a considerably higher risk environment than we have seen for some time. In response, some investors have looked to diversify and de-risk their portfolio by investing in ‘defensive’ or ‘value stocks’, while others have adopted a “cash heavy” strategy, deciding to keep a large portion of their portfolio in cash with the aim of protecting it from the volatility in the stock market. While both approaches have merit, they also have their flaws, as stocks and bonds are highly correlated and being “cash heavy” means inflation is eating away at any growth, not to mention the income tax burden.
Both strategies, one can argue, lack a degree of diversification, as demonstrated last year. The traditional 60/40 portfolio split between stocks and bonds did not mean investors beat inflation or managed to protect their capital and, looking ahead, it’s hard not to see this continuing to be the case. The rules of the game have changed, and investors need to consider an asset class that is not correlated to the traditional markets to increase diversification and, in so doing, reduce risk. The alternative for investors is the alternative investments market which is diverse and growing.
Alternative investments have many categories, with the main steam generally including private debt, private equity, venture capital, hedge funds, structured products, and, more recently, cryptocurrencies. They offer powerful risk-adjusted returns and do so because of how they are set up and the underlying assets they hold. Alternative investments generally place capital in unlisted instruments and tend to have lock-in periods ranging from 5 to 10 years. This lack of liquidity is where the opportunity and risk lie for investors, as they are rewarded with higher returns when compared to more liquid stocks and bonds, and thanks to the low correlation alternatives have to traditional assets, they tend to counter stocks and bonds – offering investors an effective diversification strategy which reduces the risk of their overall portfolio.
Allocating a portion of a portfolio to alternative investments is becoming increasingly popular. According to Preqin, an alternative investments research firm, global investments into alternatives will continue to grow strongly from USD 13.32tn at the end of 2021 (up from USD 10.74tn in 2020) to USD 23.21tn by 2026.
Here is our overview of the various types of alternative investments available in the South African market.
|Investments||Risk level||Lock in period||Return potential||Generally, the min investments are|
|Venture capital||High||5+ years||High||R500 000+|
|Private Equity||High||5+ years||High||R500 000+|
|Private debt/credit||Moderate||3 to 5 years||Moderate||R100 000+|
|Structured products||Varied||1 to 5 years||Varied||R100 000+|
|Cryptocurrency||Very high||No lock-in||High||No minimum|
|Hedge Funds||High||No lock-in||High||Varied|
|Renewable energy||Low||5+ years||Moderate||R100 000+|
So, what alternative investments should you be considering? As illustrated above, the alternative investment market is diverse in relation to potential investment exposure and risk. The key is understanding your risk profile, particularly whether your investment portfolio requires riskier investments and whether or not you will need access to the funds during the fixed-term period of the investment.
Where does one find credible alternative investments? Alternative investments are complicated and risky investments. Thus, our advice would be to approach a reputable financial advisor. The reason is that financial advisors are incentivised to engage with alternative investment fund managers and to review and perform due diligence on their investment offerings. Financial advisors are also disincentivised to support disreputable fund managers as they will have to deal with the reputational backlash from clients.
- Chris McCormick & Jonty Sacks – Jaltech Fund Managers
Jaltech’s objective is to create a transparent, accessible and regulated investment environment for alternative investments, thereby making alternative investments available to the wider investor market in an investment environment where compliance, regulations and investment management is at the core of the business.
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