Print this article

EXCLUSIVE: Defining Alternative Investments Is Tough, But They Can't Be Ignored - Summit

Tom Burroughes

2 July 2014

One of the oft-noted features of finance is that terms such as “alternative investment” or “hedge fund” can be tough to define. But whatever linguistic problems arise, the areas of private equity, hedge funds, property, commodities and esoteric areas such as fine art are no longer obscure. They must be understood, at least, if not always embraced.

The importance of these investment assets – or tools for investing – was the subject of a wide-ranging debate at the recent WealthBriefing Summit 2014 event held at America Square in London’s City financial district. Several themes came to the fore: the need to understand these areas in terms of their liquidity – or lack thereof – the increasing degree of regulation; a need for managers to understand diversification possibilities – and limits – of alternatives; and above all, to cut through the jargon and keep the focus on end-results for the client.

Speakers on the panel, chaired by WealthBriefing group editor Tom Burroughes, were Yolande Barnes, who is director, world research, for . Sponsors of the event, organised by ClearView Financial Media, publisher of this news service, were Advent; Appway; Platform Securities; smartKYC; Equipos (now part of SimCorp); BITA Risk; Portcullis Trust (Singapore) Ltd; Dion Financial Solutions; Union Bancaire Privée; WDX, and Wealthmonitor.

Right from the get-go, panellists wrestled with the very word “alternative”. Savills’ Barnes noted that property, as an asset class, has been around since the dawn of human settlement, so it is not really so alternative, and commodity trading has gone on for centuries. And the recent splurge of central bank money creation – aka quantitative easing – means that there has been a great appetite for such real assets. “I don’t think we will be talking about most real estate as an alternative asset class. Chris Wyllie said “he never really liked the term 'alternative'”, as the word suggested it was a “fringe” matter. Rather, he said, a better identifier for what some of these areas had in common was liquidity – or the lack of it. Certain other factors noticeable among alternatives are, sometimes, a lack of counterparties and difficulty in valuing investments at some times, he said.

Property

Barnes talked about developments in real estate, noting that it met a variety of requirements from investors, some of whom were concerned about capital protection, while others sought income, and others, capital gains. This applied across commercial and residential real estate, she said.

A lot of the real estate investment of recent times has been concentrated in large, urban centres such as London and New York. “Initially, a large reduction in world yields has made a lot of city properties look fully valued and in some cases, overvalued, given likely rental revenue growth. We are now seeing the rise, therefore, of 'second-tier' cities,” she continued, mentioning the likes of Miami and Los Angeles in the US, for example. There has also been a trend towards buying luxury property in resorts and non-city locations.

She was asked about the risk of politicians in certain countries trying to cool red-hot prices with measures such as tax. “Political risk is probably, globally, the biggest risk on the horizon. That’s certainly the case in the global cities,” she said, pointing out the controversy about buyers of prime properties for investment purposes while young people struggle to find a small apartment.

Art

ArtTactic’s Petterson said that analysis of the fine art market must not overlook the emotional nature of the sector. In the US, art transactions are worth around $60 billion in total, having shot up from around $20 billion 10 years ago. “It has gone from being a US and UK market, in the main, to a much more global one,” he said, citing the proliferation of global art fairs and shows, such as the Basel Art Fair, among others. Much of the focus is growing on newer artists, as the works by Old Masters and certain other quarters is harder to find and is up for sale relatively rarely, Petterson said.

“For many historical art categories, the works aren’t available – they are in collections or in museums,” he said.

Wyllie said it is important for an investor to take responsibility for a decision to put money into art, particularly if it was driven as much by emotion as cold, rational calculation. This is why it makes sense for investors to keep art holdings in a ring-fenced account, he said.

Hedge funds

Chapple examined how the hedge fund space, which is now facing up wider and deeper regulation in the wake of the 2008 financial crisis, has had to become more open about its affairs, including fee structures, than before. But he worried that, for all the justifiable worries about protecting end-consumers, some regulation has gone too far, at the expense of returns. “In some case it is like a sledgehammer to crack a very small nut,” he said. However, in some cases it has been the demands of investors, rather than regulators, that have driven changes towards greater transparency and disclosure.

Howells said the hedge fund space has been unfairly maligned to some extent in recent years. “There are, or were, unrealistic expectations from people in what they could get from their holdings. The onus needs to be put back on investors and conduit investors to understand and take responsibility for what they are buying,” he said. Hedge fund strategies vary considerably in terms of return profile, risk and liquidity, he said.

Because of some nervousness in the markets about bonds and equities after the recent years, there is interest in what hedge funds, given their characteristics, can provide, he said.

Howells was asked about areas such as Bitcoin, the cyber-currency that has been championed by libertarian free-marketeers and worriers about state-run money on the one hand, and feared by governments due to potential abuse by terror groups and criminals, on the other. “We’ve done some work on Bitcoin but it isn’t an area we’re comfortable with as there is so much uncertainty,” he said.

Finally, on the classic “alternative” of gold, Wyllie said that gold is misunderstood and that analysing different periods of time can give very different impressions on whether it is a safe haven or not. “Gold presents a dilemma. Investors like it as a safe haven right now. However, its history shows it oscillates between long bull and bear markets. This makes it hard to estimate an expected return, unless you have a multi-decade time horizon. You need to be tactical,” he said.