(Originally posted on November 10th 2009)
Today there is no other alternative but to invest in alternative investments. However more and more banks and financial institutions are distinguishing investments by those that provide alpha and those that provide beta.
Similarly the last year and a half has seen the metamorphis of the emerging market. Exposure to BRIC and other emerging markets should be an essential part of a portfolio. If you buy into vodafone then you are by no means buying a developed market U.K. based company. Conversely you may actually be buying a company that depends more on the Asian and Eastern European markets for growth, while they lose market share in their traditional markets where O2 which is owned by Telefonica gets all the exclusive deals.
In the coming years I think the markets currently classfied as emerging will outperform the developed markets with a better risk adjusted return. I do not think that we will see years where the return would be greater than 50% but if the US markets are giving 8% with a 5% volatility and the Asia market are giving 10% with an 7% volatility then surely it will be better to go in for the latter.
This financial mess was cataclysmic and requires a paradigm shift in our thinking of investments. Are fixed income or even. Government issued bonds safe? Are investments backed by real assets safe? Are hedge funds really riskier than equities?
If it was up to me then I would get my entire exposure to the asset classes through hedge funds and ETF’s. Hedge Funds I believe are flexible in nature even if they are not liquid for investors. ETF’s gives you access to the broad market and asset classes. You get your beta from the ETF’s and alpha from hedge funds. You don’t end up paying unnecessary fees to managers. I would rather see the profits of those investments increase by the non payment of fees rather than fatten their pockets. Besides I do not think that banks actually provide sufficient service to justify their fees. But sometimes you just don’t have a choice. A small sized family office will not have the manpower to do the due dilligence of a fund properly. It is not cost effective. When stuck between the devil and the deep sea it may just be better to sleep with the devil than risk drowning in the process of finding out if you can swim in the deep sea.