Advice for intelligent alternative investment in 2018
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Focusing on actual returns and investing in obscure asset classes could help alternative investors do well in 2018, according to a recent article written by an industry expert.
Writing for Business Insider, Peter Douglas, a director at the Chartered Alternative Investment Analyst Association (CAIA) Foundation, has set out his five strategies for successful alternative investments in 2018.
His first piece of advice is to focus on ‘absolute returns’ rather than being blindsided by claims that a particular asset will ‘outperform the market’. He explains that many fund managers will focus too heavily on how their product performs in relation to others, as opposed to how much money it will actually make the investor. “Although it’s good to review whether a particular manager has done better than the market or not, ultimately it doesn’t matter; if the market goes down, even if you’ve lost less than the market… you’ve lost money,” he states.
Risks are another area that need attention, Douglas claims. He says that investors need to understand that risks are multidimensional. He advises that, before making an investment decision, investors should think carefully about the risks involved – even those about which investors can do nothing. Douglas claims that investors will make better decisions during uncertain times if they have already considered the risks carefully.
Douglas goes on to recommend that intelligent investors look at putting their cash in asset classes that are less obvious in order to make the best returns. He explains that alternative investments are usually less obvious (hence the term alternative), however, there are varying levels of alternative and the less well-known asset classes often hold the best opportunities.
Another piece of advice offered for intelligent investing is to constantly revisit the assumptions upon which an initial investment is made. For example, if an investor has put cash into real estate that she assumes will grow in value due to area gentrification, she should examine whether those assumptions continue to ring true throughout the life of the investment, adjusting her exposure accordingly.
“Once you make an investment, you can’t control your return, but you can understand what will influence or drive the return,” Douglas explains.
The fifth and final piece of advice for intelligent investing in 2018 is to diversify. He underlines the fact that this does not simply mean buying up different assets. True portfolio diversification means to vary the risk and return parameters for your investments. In an ideal world, if one investment is negatively exposed to changes in property prices, then the next needs to perform well when property prices fall.
He advises: “An alternative investor would, for example, prefer a mix of return drivers (some equity risk and some fixed income risk); a mix of liquidities (some real estate and some structured products); a mix of market risk and manager risk (some ETFs and some hedge funds).”