Alternative Investments

What are alternative investments?

Alternative, or non-traditional, investments are holdings in items other than “regular” stocks (shares, or equity) and bonds. They can include private equity (ownership stakes in businesses that are not publicly traded companies), hedge funds (private pools of investment capital), commodities, futures (agreements to buy an asset at a predetermined time and price), options and derivatives (contracts for exchanging value or assets) based on traditional investments. Alternative investments can also include real estate, art and collectibles.

Pension plans, endowments funds and ultra-high-net worth individuals have been using these investments for years. They may work for you too.

What are the benefits?

Private and alternative investments are usually less volatile than traditional investments because they carry a monthly valuation based on their actual value, rather than a daily – or hourly ­– market valuation that’s often based on emotional reactions. Another key benefit is that they bring greater diversity to a portfolio and importantly, their returns generally have low correlation to those of the stock market.

With private equity investments, the goal is often for the investors to finance significant change and improvement in a company and then sell their ownership stake at significant profit when the business has turned around. This is a long-term proposition.

Publicly traded equities make up less than half of what’s available for investing. Taking advantage of the alternatives thus opens up many more possibilities.

What are the risks?

Private equity and other alternative investments are considered higher risk than most other investments because they are less liquid. That means you may not be able to sell them when you want to.  But some types have shorter holding periods, and those that are less liquid tend to have correspondingly higher returns.

Who can buy alternative investments?

Private and alternative investments are not for everyone. They are more complex than basic investments such as individual shares or mutual funds, bonds or GICs.  You must be comfortable enough, both financially and mentally, to take some risk. That said, they are not just for the fantastically wealthy – they can be appropriate for investors with moderate wealth. But there are regulations governing who can invest: Accredited Investors must have a net worth of over $5 million, over $1 million in investible assets or a net income of at least $200,000 per year for an individual ($300,000 for a couple). The rules are intended to shield more vulnerable investors from alternative investments’ illiquidity, perceived risk and product complexity. Working with a qualified Portfolio Manager, who acts as the Accredited Investor on your behalf, gets you past these barriers.

Talk to an investment advisor with experience specifically in this type of investment to find out whether alternative investments and private equity have a place in your portfolio.

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