Seeking greater return on investment, while shielding portfolios from the volatile nature of stock and bond trading, wealthy investors continue to invest in alternative investments. If you fancy yourself a savvy investor and you have the tolerance for risk, non-traditional investing options are an appealing alternative to stocks and bonds.
The Alternative Investment Landscape
Further examination of the ownership and sourcing of alternative investments, as well as the use of private equity investing, the Spectrem Group’s latest perspective report: Use of Hedge Funds and Private Equity in the Portfolios of the Wealthy; uncovered that:
- The average investment for the US$25 million investor ranges from US$3.5 million for private placements to US$12.6 million for hedge funds.
Ownership of alternative investments increases with an increase in wealth and decreases with increasing age.
- Hedge funds receive more money from alternative investors than any other class of alternative investments, particularly from those with a net worth of US$25 million or more.
- While 42 per cent of investors with a net worth over US$25 million own hedge funds, 69 per cent of investors with a net worth of US$125 million or more are invested in hedge funds.
Utilisation of alternative investments increases as wealth increases, and advisors should recognise the opportunity to introduce alternative investments as an investor’s net worth grows … Investors who find alternatives attractive are looking for a higher rate of return and a diversified portfolio of investments. – George H. Walper, Jr., President of Spectrem Group
Albeit the statistics are positive and are cause for excitement, many amateur investors struggle with finding their place in the alternative investment marketplace. In order to find the answer, investment-seekers must be acutely aware of how knowledgeable they are with regards to non-traditional investments, as well as truthful with themselves about what their tolerance for risk is.
Are You Investment Savvy?
Of those investors who considered themselves to be “very knowledgeable” about investments are more likely to have alternatives in their portfolio than those who do not (37 per cent versus 24 per cent). On the other hand, those who consider themselves only “fairly knowledgeable” about investing are more likely to not include alternative investments (61 per cent versus 53 per cent) in their portfolio.
What is Your Risk Tolerance?
Compared to other investors, those who are investing in alternatives are more likely to describe their risk tolerance as “aggressive” or “most aggressive,” than those who do not invest in non-traditional options.
In the study, 40 per cent of ultra-high net-worth investors who owned alternative investments, identified their risk tolerance as “aggressive,” compared with 39 per cent of those who describe their risk tolerance as “moderate,” and 11 per cent who reported their risk tolerance as “conservative.”
Investors who have carefully assessed the risk all of the more traditional opportunities for investment and have made the decision to begin to investigate the market’s niche alternatives, that have consistently demonstrated low correlation and strong returns despite a volatile and challenging economic times, have succeeded in diversifying their holdings, eliminating unnecessary risk and positioned themselves for long-term financial security and success.