The last five years have been very challenging from an investment perspective for high net worth investors (HNIs) and investment advisors. Equities as an asset class have a long way to go and returns have actually been negative inflation-adjusted, and fixed income investments have barely kept up with inflation.
This has resulted in a search and need for alternative investment options that could help HNIs earn a return that is reasonably predictable and above inflation. Alternative investments help investment advisors reduce risk on the overall portfolio, thereby enhancing risk-adjusted returns as the return profiles of some the alternative asset classes are not correlated with traditional asset classes. So, what are the alternative investment avenues that HNIs or super-affluent investors can look forward to in 2013?
High-yield non-convertible debentures: As credit growth in the economy has slowed, there are a few sectors that are finding it tough to raise money through traditional channels. Hence, it has thrown up interesting high-yield fixed income opportunities for HNI investors viz., real estate.
An investor needs to assess the quality of the underlying collateral and the terms of the issue to check on how the investment has been ring-fenced by way of a charge on cash flows. A few asset managers have launched products around this theme and we may see more such issuances this year. Mezzanine corporate debt is another area which will see activity and we will see funds launched to target this market under the new AIF guidelines.
Stressed Assets Fund: Asset reconstruction companies (ARCs) came into being in 2002 with the passing of the SARFAESI Act and the primary task of these companies is NPA (non-performing asset) resolution. With the release of the new alternative investment fund (AIF) guidelines by Sebi, it’s possible for individual investors to participate in this asset class.
As the category suggests, these funds will invest in stressed assets which are declared NPAs by banks at attractive valuations and seek to generate returns by settling the underlying loan. If invested wisely, these investments can yield internal rate of returns (IRRs) in excess of 25% as these assets are normally bought at extreme discounts to capital value.
Hedge funds: Under the new AIF guidelines, we are likely to see hedge fund kind of strategies being launched. These strategies will have the ability to take leverage to enhance returns for investors, regardless of the market direction. These funds can take long or short positions depending on market trends. This could include several strategies viz. pair trading, spot future arbitrage and fundamental or technical indicator-based investment strategies. Even locally, investors can expect fund launches on these lines.
Structured debentures: Structured debentures have become increasingly popular with HNIs over the past few years and will continue to remain an attractive way of capturing volatility and customising strategies based on a market view. There are risks in investing in these debentures and apart from liquidity and credit risk of the issuer which the client is exposed to, there are risks related to the view expressed in the underlying asset class. Hence, investors should ensure that the risk is mitigated by ensuring that the issuer of the debenture is of a high credit quality and the view taken is in line with expectations of the underlying portfolio.
Commodities and currencies: Alternative investment asset classes such as commodities and currencies are increasingly gaining favour with investors. Returns from spot arbitrage in commodities have ranged between 12-14% and at the same time ensuring high liquidity. These are increasingly finding favour with HNIs and super-affluent investors as the returns are high and they offer monthly liquidity.
Remittance: HNI families have the ability to remit $2,00,000 per family member in every financial year under the liberalised remittance scheme and increasingly, advisors are trying to capture this arena by having tie-ups with boutique investment firms overseas or referring clients to their own offshore investment desks. As Indians increasingly travel overseas and explore opportunities, we see an increasing trend of investors who want to open accounts overseas and invest in other markets.
This not only helps reduce risk of currency depreciation, but opens up new investment avenues. However, it’s best to consult with an advisor who can customise the investment portfolio to suit your requirements.
The new year seems quite exciting for investors who wish to look at alternative investments, but at the same time the risks in these products should be examined carefully with the help of an advisor so that the underlying investments take you closer to your overall investment objectives and goals.
The writer is head - investment advisory, Motilal Oswal Wealth Management