Tuesday, April 01, 2008

Alternative Investments

Alternative investments are hedge funds, managed futures and managed currency funds. The proponent of this asset class argues that it is not correlated to the traditional asset classes, for example, they can move in the opposite direction to equities.

This is suitable for short term investors, including professional fund managers, who are required to avoid showing a portfolio loss during a year.

For a long term investor, it is better to take the volatility and benefit from the average higher return over the long term. There is no point in investing in equities and than offsetting them by alternative investments. This strategy incurs high costs and reduces the return to the long term investor. It gives good fees to the professionals (i.e. fund managers).

If the investor wish to avoid volatility, it is better to invest in fixed income bonds, and accept a lower long term return. Do not invest in complicated structured products (including alternative investments) that gives you an even lower return.

4 comments:

Anonymous said...

Thank you for sharing this.

Higher risk, higher returns (maybe).

You have a good point. If one focus on something that is simple, transparent, low-cost, such as equities and bonds, over the long run, one should be better off, less the stress.

It is the alternative investments that give more headaches. I saw advertisements in the free tabloids, that tried to get people to invest in a investment scheme that can "double their income" every year.

I don't know how that advert can be allowed since, there is no guaranteed on investment results. This type of "alternative" investments, well I think consumers can do less of.


R.

blackbox said...

Mr Tan,

How about the fund from www.fullertonfund.com

The website states that it is Temasek owned and has been running for 17 years. Sounds credible.

Anonymous said...

A single Hedge Fund is very risky. That's why a Fund-of-Hedge Fund (FOF) was introduced to diversify across the different strategies and managers of the various funds.

This reduces the violatility and i have done some readup on this and it seems that by having a 5~30% allocation to a FOF, you will be able to move your portfolio to a higher return at a reduced risk. (ie, it moves itself very close to the Efficient Frontier with a reduced violatility as compared to an equities/bond portfolio with the same return).

hasan said...

If the investor wish to avoid volatility, it is better to invest in fixed income bonds, and accept a lower long term return. Do not invest in complicated structured products (including alternative investments) that gives you an even lower return.

investing in farmland

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