Alternative Investments

In 2004 all the newspapers in India were going gaga over Mr Vijay Mallya for bringing back the sword of Tipu Sultan and thus restoring India’s glory. But the fact of the matter is that it was much more than bringing back the glory of India.
As the name suggests these are investments which are unconventional in nature. These investments are the ones apart from the traditional ones of stocks, cash and bonds.
The Tipu Sultan sword is one example. It was bought for Rs1.5 Crore but its current value could easily be triple of that amount. The primary reasons for this could be the rarity of the item which in this case is the sword which is the only one in the world.
Another example of alternative investments is league teams and these teams generate huge returns. An example of this is the Rajasthan Royals IPL team. It was purchased for $67 million by its promoters in 2008 and in 2009 its 11.7% stake was sold to businessman Raj Kundra for US $15.4 million thus valuing the team at $130 million and generating a 94.03% return!
There are other alternative investment products such as stud farms, real estate (islands, vineyards, etc.), hedge funds, art, wine, coins, stamps, private equity, etc.
The Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, based on 2002 data, showed high net worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007, this had reduced to 9%. Alternative investments are sometimes used as a tool to reduce overall investment risk through diversification
Positives
 Diversify an investor’s portfolio with the low correlation
 Reduce risks.
 Offer good profit generating opportunities.
 Give astronomical returns

Negatives
 The liquidity of these investments is lower than that of stocks, bonds and cash.
 The fee structures for these investments are generally higher than those for stocks and bonds.
 These investments require specific expertise, as a result of which the costs associated with due diligence are high.
 It is difficult to establish benchmarks for these investments. This hinders the performance appraisal of the investments. Moreover, the lack of performance data limits an investor’s ability to make an informed choice.

Thus venturing into alternative investments is an art in itself as there is not much data available regarding their valuations.

Published on :Finertia - GIM's Finance portal