Investing in Alternative Asset Classes

May 30, 2018

Alternative asset class

Investing in alternative asset classes

Alternative investments have been gaining more and more traction with mainstream investors in recent times. The reason? With a little research and consideration, their portfolios have been gaining a highly diverse, lower risk asset class that delivers consistent returns.

The first thing to know when considering adding an alternative investment to your portfolio is that they are not for everyone. Many alternative assets are legally accessible only by sophisticated investors. The criteria for sophisticated investors is defined by The Corporations Act (2001), and to qualify you need  a net worth of $2.5m or  annual income of over $250,000.  The restrictions exist as many alternative investments rely on private placement registration exemptions, and to serve as a protection measure for  inexperienced investors.

The theory behind adding an alternative investment to your portfolio is that it is uncorrelated with your mainstream asset class of shares and bonds. This means that when your mainstream assets are under performing due to fluctuating market forces, your alternative assets keep your portfolio on track, as they remain isolated and therefore unaffected by these fluctuations.

Building genuine diversity (in terms of underlying correlations rather than asset class titles) can be  a challenge if you have previously shied away from alternative assets in favour of shares, property, and term deposits. This can be compounded by a lack of awareness of just how much the term ‘alternate asset’ now encompasses.

Historically there has existed a misconception that hedge funds are the only alternative asset that can add value to your portfolio and spread risk through increased diversity in volatile markets. However, with the dawn of fintech, and the innovations in financial services it has brought, investors now have access to a greater variety and choice than ever before.

The benefits of an alternative investment, when chosen well, is that it will deliver on three simple but important factors:

  • It is less correlated with financial markets, offering security in uncertain times and providing the actual benefit of a diversified holding
  • It gives investors access to an asset class not available on the public market
  • They offer safety in consistency of return at the expense of liquidity (alternative assets typically have lower short-term liquidity; however, this is not always the case)

Take Timelio as an example. Our marketplace has opened up an asset class that has only previously been available to banks and other institutions, it is uncorrelated to the mainstream investment market, meaning fluctuations have little to no effect, it’s highly liquid with investments maturing on average after 45 days.  It offers  diversity  and the ability to invest in as little as 5% of an invoice from a wide variety of industries.

The investment opportunities we offer, either directly or through the Timelio Capital Fund (TCF), have been developed to offer flexibility in finding the right investment for your portfolio. Investing directly offers greater liquidity and control, however this is coupled with much higher involvement and greater time commitment. The TCF  has greater portfolio diversity and a significantly lower level of involvement, however this comes with less liquidity and (generally) a lower return that direct investment.

According to Money Management, Australian investors currently have very limited exposure to alternative assets, despite alternatives now making up 16% of the Australian investment landscape. This is attributable to a lack of access rather than a lack of demand, as few alternative investment managers are structured to provide investment offerings to individual investors.

However, this is changing as more and more investors begin to realise the benefits that alternatives offer, and now seek to bolster their portfolio with these investments, and fintech’s are more than willing to step in and satisfy this demand.

If you want to add invoice finance to your portfolio, or for more information about the investment opportunities Timelio offers, get in touch with our Growth Manager David Webster (dwebster@timelio.com.au or 0490 228 953).

 

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