The Benefits of Alternative Investments for HNIs

28 Nov 2024 , 11:53 AM

Alternative investments are gaining popularity among high-net-worth individuals (HNIs) due to their diversification and high return potential. As traditional investments like stocks, bonds, and real estate become saturated, HNIs are exploring alternative investment solutions to optimise their portfolios. This blog discusses the key benefits of including alternative investment strategies for HNIs.

What are Alternative Investments?

Alternative investments refer to assets and strategies that fall outside the conventional asset classes of stocks, bonds, and cash. Some popular alternative investment solutions include private equity, venture capital, hedge funds, managed futures, art & collectables, commodities, cryptocurrencies, and more. While every alternative asset has its risk-return profile, most options offer high return potential, low correlation with traditional assets, and inflation hedging abilities.

Key Benefits of Alternative Investments for HNIs

This section covers the most significant benefits of investing in alternative investments for HNIs.

Diversification

One of the top reasons HNIs allocate a part of their portfolio to alternative investments is to diversify their holdings across various asset classes, strategies, fund managers, and geographies.

Concentrating all wealth in stocks and bonds increases risk. Adding alternative assets with a low or negative correlation with equity markets can help HNIs develop a well-diversified portfolio.

Inflation Hedging

Many alternative assets provide an inflation hedge by generating returns higher than inflation over long periods. Investments in real assets like real estate, infrastructure, commodities, and energy maintain or increase their value during high inflation conditions.

Less Volatility

Alternative investment strategies aim to deliver steady returns regardless of market cycles by using effective hedging techniques. For instance, hedge funds use short-selling techniques and derivatives to reduce volatility. Adding low-volatility assets can help HNIs balance the high swings of stock investments.

Higher Returns

While past performance does not guarantee future returns, most alternative investments have delivered higher returns than traditional assets over long periods. For instance, private equity has significantly outperformed public markets in the past few years. The high return potential of alternatives appeals to HNIs.

Early Access to Opportunities

Through private capital channels, HNIs can get early access to investment opportunities before they become mainstream. Private equity and venture capital funds invest in startups and emerging tech companies much before their IPOs. Similarly, hedge funds spot and capitalise on trends ahead of public markets.

Types of Alternative Investment Strategies

This section examines some popular types of alternative investments for HNIs:

• Private Equity: Investing in private companies not listed on public exchanges across various sectors and geographies. Returns are generated through IPOs and strategic sales.
• Hedge Funds: Employing advanced investment techniques like short selling, arbitrage, derivatives, and leverage to generate steady returns regardless of bull or bear trends in the markets.
• Venture Capital: Providing capital to innovative startups, early-stage businesses, and emerging tech companies in exchange for an equity stake. Returns are realised through IPOs and acquisitions.
• Managed Futures: Utilizing financial derivative instruments linked to commodities, currencies, and indexes to capitalise on global macroeconomic trends.
• Art & Collectibles: Investing in artwork, antiquities, coins, wine, jewellery, and other collectables that have been appreciated for decades and provide portfolio diversification.

The varied alternative investment strategies cater to HNIs’ different risk appetites and meet specific portfolio objectives, such as diversification, inflation hedging, and low volatility.

Conclusion

In today’s uncertain markets and low interest rate environment, HNIs are finding appeal in moving some of their wealth from traditional stocks and bonds towards alternative investment solutions. Alternatives optimise returns and decrease overall portfolio risk due to diversification across various asset classes, fund managers, and geographies.

With numerous alternative strategies now available, HNIs can evaluate their risk tolerance, return objectives, and liquidity needs to construct a balanced portfolio allocation between traditional and alternative investments.