The Savvy Investor Other Alternative Investments section considers the latest articles, white papers, thought leadership, and commentary on alternative investment opportunities outside the main ‘alts’ scope.
The range in this topic covers insurance-related instruments (catastrophe bonds, reinsurance securities, securitises-backed life settlements), master limited partnerships, exotic alts such as wine and art, alongside crypto assets and NFTs...
Alternative investments provide investors the opportunity for greater portfolio diversification, as they appear lowly correlated to primary market movements.
Insurance linked securities (ILS) are investment products whose prices are based on an insurable event e.g., mortality, longevity, or a natural disaster. ILS are usually in the form of a bond and, like a conventional bond, will have a maturity and coupon. However, they are not without risk. In the case of catastrophe (CAT) bonds, which are issued by insurers to shore up reserves in the event of a natural disaster, investors may see only a proportion of their principal returned should a ‘trigger event’ occur before the bond matures. The extent to which the principal is repaid will be dependent upon the stated trigger conditions at the time the bond was issued.
Alternative risk premia (ARP) is a collective term to describe investment strategies based on a particular investment approach e.g., value, growth, momentum investing, etc. These approaches or factors can be combined in varying proportions and directions (long or short) as part of an overall ARP asset allocation strategy. ARP is best applied in liquid markets such as equities, bonds, currencies (FX) and commodities, and its adoption is becoming more widespread in the institutional investor’s asset mix.
Although volatility is not strictly speaking an asset class, the growth of ETFs and derivatives has enabled institutional managers to harness changes in volatility pricing to manage risk and generate excess returns. Since high volatility spikes in markets are sporadic and relatively scarce, modern managers are able to exploit this phenomenon via short volatility strategies. As well as trading ‘short vol’, managers are increasingly utilising volatility term structure strategies both for hedging and alpha generation.
Other Alternative Investments pertains to:
- Insurance-linked securities
- Alternative risk premia
- Master limited partnerships
- Art, wine, medicinal cannabis
- Cryptocurrencies, crypto assets, NFTs
In summary, the world of alternative investment is arguably diverse with institutional investors now having access to novel and somewhat obscure products such as Australian water rights, fine art, wine and even medicinal cannabis.