Posts Tagged ‘alternative assets’

“Alternative Assets Provide Diversification Opportunities, Higher Potential Returns” (part 1) by Paul L. Palandjian, Managing Director, Trinity Group Ltd

October 11, 2012

Alternative assets offer institutional investors the opportunity to generate higher returns than usual with diversified portfolios that can often withstand fluctuations in the market. Traditional assets such as stocks and bonds have historically delivered steady income over a period of time, but they also have drawbacks. Fixed-rate bonds and cash equivalents generally provide security against risk but relatively low returns, while stocks have the potential to produce higher returns but are extremely vulnerable to market instability.

Institutional investors in the past almost exclusively relied on traditional assets to keep their money working for them. Most experts traditionally recommended that institutional investors create portfolios comprised of 60 percent stocks with the remaining 40 percent dedicated to bonds. Over many years and market cycles, this formula delivered good returns. Moreover, managers who oversaw traditional assets benefitted from public trades, knowledge about market cycles, institutional history, and benchmarks.

However, institutional investors eventually realized that they could add new types of assets to their portfolios to lessen risk and improve returns. Alternative assets include private equity, infrastructure, real estate, commodities, hedge funds, and tactical asset allocation. In addition, alternative assets sometimes involve uncommon forms of debt such as leveraged loans and catastrophe insurance. These assets require specialized knowledge on the part of an investment manager because of their limited history, relative illiquidity, and unusual performance qualities.

When the equity markets plummeted in 2000 and bond yields remained low, investors shifted assets away from traditional instruments and into alternative investments. During 2005 alone, managers moved approximately $200 billion into alternative assets. Much of that money came from pension funds that strove to increase investment income to accommodate expanding payout requirements. By 2006, alternative assets represented as much as 20 percent of all global institutional investments. Financial analysts expect these numbers to continue to increase in the years to come as institutional investors expand their familiarity with the asset class.

About the Author:

Paul L. Palandjian serves as the Managing Director of Trinity Group Ltd, a United Kingdom-based private bank. Mr. Palandjian specializes in real estate investment and defense consulting.