Considering alternative investments? Step 1 is protecting your hard-earned money

As with any type of investment opportunity, alternative investments can offer great returns, or make your money disappear. To protect your earnings and investment gains you must understand what you are investing in.

The term ‘alternative investments’ has become a buzzword in the investments industry of late. This new-found interest is predominantly driven by volatile markets, economic news, and geopolitical themes that have more pronounced effects on traditional assets.

Traditional assets, be it long-only funds, listed equities, or bonds tend to have daily or at least regular pricing determined by market participants (willing buyer, willing seller). However, market participants are ultimately just people, who tend to be driven by emotions, daily news, information, and fluctuations in prices, which, in turn, creates a new set of emotional impacts. Despite all this heavy price noise on asset markets, listed companies continue to produce and sell the same products and services.

The daily pricing of alternative investments is often not reported meticulously and promptly. There are some exceptions, such as hedge funds (hedge funds are regulated on the same basis as unit trust funds). Where daily pricing and even monthly pricing does not exist, it can create the idea of less risk as one is not aware of daily price fluctuations. This is obviously a false sense of being “risk free”.

Although price volatility might not be seen or felt, the risks still exist. If an unlisted company closes down where will investors find themselves in the pecking order of creditors? This is a real risk of capital loss and is not merely market or price volatility.

Therefore, it is important to take note of all the risks involved when investing your hard-earned money into any investment product, be it alternative or traditional. Find an expert who can assist in doing the due diligence and who will ask the right questions.

This is not an argument that you should never consider alternative investments; rather it is a call to urge you to take note of all the risks involved. As with any investment decision, one does not merely focus on the returns, packaged in glorified marketing material, nor the perceived price volatility; one must develop a deeper knowledge of what sits within and drives these returns.

Some standard and simple questions can go a long way in protecting your hard-earned money. You must ask yourself the following when thinking about alternative investments:

• Where is my money ultimately invested?
• Given the answer above, what is my recourse as an investor if things fail?
• Who owns the entity my money is invested in?
• Can I get hold of audited statements of the entity? At a bare minimum, one should be able to identify the entity’s debt versus its assets, with debt including promises made to investors in the entity.
• How are the returns generated?
• Do I understand the risks taken to achieve these returns? Every investment has risk. Risks differ from investment to investment.

All alternative investments cannot be painted with the same brush, be it positive or negative. Investments differ tremendously from one another. Some are good, some great, some bad, and some are downright atrocious.

Ultimately the investor needs to do the legwork to understand what they are investing in. Alternatively, you can partner with a financial advisor with the knowledge to do the legwork on your behalf. As the saying goes, a stitch in time saves you nine!

Efficient Wealth. It’s what we do.

Find out what Efficient Wealth can do for you at www.efw.co.za