The global market for alternative assets has seen significant growth, reflecting its pivotal role in today’s investment landscape across private equity, venture capital, hedge funds, real estate, infrastructure, collectibles, private debt, and more.
Investors are no longer focusing solely on traditional stocks and bonds. They are diversifying and exploring alternative investment opportunities.
According to Preqin’s Future of Alternatives 2028 report, global alternative assets under management (AUM) are expected to reach a whopping $24.5 trillion in 2028, compared to an estimated $16.3 trillion at the end of 2023. This projected increase of over $8 trillion in just five years demonstrates a clear trend toward greater adoption and allocation to alternative assets.
South Africa is keeping pace as alternative investments gain popularity among individual investors and financial advisers, with both groups getting involved in this asset class and showing intent to increase their allocations to alternative investments.
Several key factors are driving this growing interest globally:
The democratisation of access to alternative investments
Alternative investments have become more accessible to a wider range of investors, due to several key developments:
– Technological advancements in financial platforms.
– Lower minimum investment thresholds.
– Increased education and awareness about alternative assets
– Financial advisors are increasingly incorporating these options into client portfolios.
– There are many more investment options available in this asset class, including crowdfunding, crypto, art, wine, real estate, energy, agriculture, etc.
This democratisation of access has opened up opportunities previously reserved for institutional investors, high-net-worth individuals, and family offices, enabling far more individuals to participate in the asset class.
The need to diversify portfolios
Portfolio diversification in alternative investments is crucial because it helps mitigate risk and enhance potential returns by spreading investments across a range of non-traditional assets.
The potential for higher returns
The attractiveness of alternative investments often stems from their potential to deliver higher returns compared to traditional asset classes. By providing access to a broader spectrum of investment strategies and opportunities, alternatives can significantly enhance a portfolio’s risk-return profile.
Protection against market volatility
Alternative investments generally have a low correlation to more traditional asset classes which means investors can reduce their overall portfolio risk. When traditional markets are declining, alternative investments may remain stable or even appreciate in value.
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As the alternative investment space continues to expand, it’s crucial for investors to do their homework and approach these opportunities with caution and due diligence. With so many offerings, comes varying risk profiles. This diversity in the alternative investment market requires investors to be more vigilant and thorough in their research and decision-making processes.
Having been pioneers in this space for over a decade, we believe these key factors are fundamental to consider when investing in alternative assets:
Returns profile
Understanding how returns are generated is crucial. Investors should analyse the expected returns, including their timing and consistency. It’s important to compare risk-adjusted returns with traditional investments and consider how they align with personal financial goals.
Liquidity
Alternative investments often have lower liquidity compared to traditional assets and require longer holding periods, typically 5 to 10 years. When assessing liquidity, investors should evaluate how easily they can sell or liquidate the investment, noting that some alternatives may have lock-up periods restricting withdrawals. It’s important to determine if there’s a secondary market available for the investment to facilitate potential sales. Additionally, understanding the terms of redemption, including any penalties for early withdrawal, is crucial. Ultimately, investors need to consider their own liquidity needs and ensure they can commit capital for the required timeframe without jeopardising their financial stability.
Track record
When evaluating track record, investors need to consider multiple factors. They should assess the historical performance of the investment or its managing fund, looking for consistent returns over an extended period as a positive sign. Investors should compare its performance against similar investments in the same category to gauge reliability and overall performance. Additionally, investors should analyse how the investment has performed during economic downturns or periods of market stress to assess its resilience and ability to weather adverse conditions effectively.
Management team
When evaluating alternative investments, the caliber of the management team is a critical factor that cannot be overstated. It’s essential to conduct a thorough investigation into the backgrounds and experience of the individuals or team overseeing the investment. Managers with a proven track record and extensive experience in navigating various market conditions typically instill more confidence. Equally important is assessing the team’s specific expertise in the particular type of alternative investment being considered, as specialised knowledge can be pivotal to the investment’s success. Furthermore, researching the management team’s reputation within the industry can provide valuable insights. This includes looking for any red flags or past issues that might raise concerns about their ability to effectively manage an investment. By carefully evaluating experience, expertise, and reputation, investors can gain a clearer picture of the management team’s capabilities and make more informed decisions about entrusting their capital to a particular investment opportunity.
Tax considerations
Alternative investments can have complex tax implications. Investors should understand how returns will be taxed, whether there are any tax advantages or disadvantages, and how the investment might impact their overall tax situation. It may be beneficial for investors to consult a tax advisor to navigate any potential tax issues.
Fees
Fee structures in alternative investments can be more complex than those of traditional investments. Investors should understand all fees involved, including set up, management, and performance fees, as well as any hidden costs. They should consider how these fees might impact their net returns and compare them to fees for similar investments.
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In conclusion, investing in alternative assets presents unique opportunities and challenges that demand careful consideration. Investors must approach alternative investments with careful consideration and due diligence, scrutinising factors like returns, liquidity, management teams, and fee structures. Success in alternative investing hinges on informed decision-making that aligns with personal financial goals and risk tolerance. As the landscape evolves, staying informed and adaptable is crucial, necessitating continuous education and, at times, professional advice. While alternative investments can enhance portfolios, they require a tailored approach to manage risks effectively and achieve long-term financial objectives.
We are pioneering fresh thinking and investment products in alternative investing. Our proprietary selection of alternatives caters to different investor appetites, from a minimum investment of R1,000 to R100,000+, across debt, energy, hospitality, private equity and venture capital, and equity crowdfunding.
If you’re interested in learning more about our proprietary selection of alternative investments, email info@grovest.co.za or call 011 262 6433