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September 07 newsletter

Alternative Assets

The standard range of investment assets are cash, fixed interest, property and shares. These assets tend to have strong liquidity. That is, they are able to be bought and sold in markets which have many buyers and sellers and who provide a fair market price for the assets. A simple example is shares, which can easily be bought and sold on the stock exchange.

Whereas, alternative assets are assets “that have less liquidity than, and/or are lowly correlated with, listed securities. These include New Zealand and global private equity, timber, infrastructure and commodities.” NZ Super Fund

An example of an investment that has a low correlation to the traditional investment classes is absolute funds. This is “because the securities they invest in and their management techniques differ from traditional investment management” Australian Securities Exchange. One example of a different management technique is the decision not to follow an index. The strategy of a traditional fund manager is to invest in shares which more or less replicate the index. They are then measured by how much they beat (or fall behind) the index. Traditional fund managers tend to perform relatively closely to the index, whereas the mandate of an absolute fund manager may have no such restrictions. They will employ techniques and investment strategies to try and beat the index. However, because they are not trying to merely match the index, their returns could fluctuate widely from the index. And, of course, this can be positive for investors when the index is falling.

Should you have an exposure to alternative assets?

This will depend on your goals, risk profile and time horizon. But, generally, some alternative assets will form part of an asset allocation strategy.

You can invest directly into some alternative asset investment options. A simple example of one such investment is shares which invest in commodities such as oil or gold. A less simple option is to purchase put or call options on a share index.

Investments in arbitrage strategies and foreign exchange swap instruments are just two of the many esoteric alternative asset investment options that a direct investor would be unlikely to engage in.

However, the most common way to achieve exposure to alternative assets is through managed funds. This is because, for the most part, investments in alternative assets are complex and require the expertise and economies of scale provided by large investment funds.

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Why not check out all those other asset classes?