Potential risks associated with alternative investments
In the previous two blogs, we not only introduced and discussed what is an alternative investment, but also looked at the varying benefits these types of investments afford. To recap, alternative assets not only offer portfolio diversification, reduced overall portfolio volatility and enhanced returns, but in some cases can also provide a regular passive income.
Like all investments, alternative asset investments also carry potential risks and drawbacks which we will discuss in more detail below. The most common risk areas to consider when it comes to most individual alternative investments fall into the following main categories.
Alternative investments: risk categories
Economic Growth Sensitivity
Investor returns relying on assets and investments exposed to the global economy can, at times, be more sensitive and underperform due to economic growth and fluctuations.
Inflation Sensitivity
Inflation can have a negative impact on investments through a decline in purchasing power. As the old saying goes ‘a dollar today is worth more than a dollar tomorrow.’ Failure to anticipate and account for inflation can mean that the actual return on an investment or future return is less than what might have been the expected value.
Yield Dependency
Component of returns stemming from cash yield. Adverse shifts in market interest rates can affect fixed income investments or assets. For example, when market rates or yield increase, the price of the fixed assets will decrease and vice versa.
Interest Rate Sensitivity
Asset price change/performance relative to changing base rates. Interest rate sensitivity is particularly relevant to fixed income assets that tend to fall in price as interest rates rise. In many cases, the longer the maturity of the asset or investment the more sensitive it will be to changes in interest rates.
Project Risk
Exposure to project specific development risk. For example, with real estate developments there are risks associated with each project such as financial (ability to pay back monies borrowed), holding costs, weather related issues and quality assurance.
Finance/Leverage Sensitivity
Dependency of continued debt availability. Tightening credit markets, fluctuations in foreign exchange rates and global uncertainty is making it increasingly difficult for both businesses and countries to obtain financing.
Illiquidity Risk
Ability to sell assets in an orderly and timely fashion without negative price impact. The more illiquid an asset is, the harder it is to sell or exchange for cash without a substantial loss in value. The assets can be harder to sell due to a lack of ready and willing investors to purchase and tend to have lower trading volumes and greater price volatility.
Regulatory Exposure
Dependency on regulatory support. This may affect the asset sellers that funds invest into as they could potentially have their license to operate withdrawn by a regulator or have conditions applied that impact the performance of the business.
The below table summaries the risk profiles for different traditional and alternative assets.
| Asset Class/Risk Factor | Economic Growth Sensitivity | Inflation Sensitivity | Yield Dependency | Interest Rate (Duration Risk) | Project Risk | Finance/ Leverage Risk | Political Risk | Illiquidity Risk | Regulatory Risk |
|---|---|---|---|---|---|---|---|---|---|
| Cash | Low | Low | High | Medium | N/A | Low | Low | Low | Low |
| Stocks | Medium | Medium | Low | Low | N/A | Low | Low | Medium | Low |
| Bonds | High | High | High | High | N/A | N/A | Medium | Low | Low |
| Private Equity | Medium | Medium | Low | Low | N/A | High | Low | High | Medium |
| Venture Capital | High | High | Low | Low | Low | High | Low | Extreme | Medium |
| Hedge Funds | Medium | Medium | Low | Medium | Low | High | Low | Medium | Low |
| Real Estate | High | High | Mixed | High | High | High | Low | Medium | Low |
| Private Credit | Medium | Low | High | High | Medium | Medium | Low | High | Low |
| Infrastructure | Low | Medium | High | Low | Low | Medium | Low | High | Medium |
| Natural Resources | High | Low | High | Medium | High | High | Medium | High | Medium |
Mitigating the risks of alternative investments for active, passive and income focused investors
Alternative investments can be a great fit for active investors, passive investors and income focussed investors. As outlined not only do they have the potential to provide diversification and reduced volatility and increased returns, but they also equally tend to offer lower transaction costs and can provide a steady source of income, allowing investors to replace or supplement income earned or boost retirement funds.
As with any investment strategy, understanding the risks is always advisable. If you are looking to access alternative investments through a fund manager, it is crucial to pay particular attention as to how the funds are structured in order to mitigate risk and enhance returns. At Remara our approach centres around structuring our funds in such a way that the risk factors are lowered and substantially mitigated, whilst still providing the opportunity for strong market returns.
Private Credit
Our Private Credit Income Fund is structured to provide diversification across the underlying assets owned within the investment fund. We have developed strong relationships with asset originators (asset sellers) in key industries which has allowed our fund managers to invest in a wide range of assets, such as personal loans, trade, business and real estate, to offer our investors an attractive risk/reward structure. Unlike other funds this approach directly addresses the key potential risks associated with investing in Private Credit, being yield dependency, duration risk and illiquidity risk, through formation of a structured pool of assets with low correlation. This approach allows our investors to enjoy a more stable yearly growth with the added ability to access funds on a regular basis with no significant lock in period.
Below is a comparison table showing the risk profile of a normal Private Credit investment fund versus the Remara Private Credit Income Fund.
| Asset Class/Risk Factor | Economic Growth Sensitivity | Inflation Sensitivity | Yield Dependency | Interest Rate (Duration Risk) | Project Risk | Finance/ Leverage Risk | Political Risk | Illiquidity Risk | Regulatory Risk |
|---|---|---|---|---|---|---|---|---|---|
| Private Credit (Traditional) | Medium | Low | High | High | Medium | Medium | Low | High | Low |
| Remara Private Credit Fund | Medium | Low | Medium | Medium | Low | Medium | Low | Medium | Low |
Real Estate
Our unique strategy is focussed on investing into a highly diversified pool of smaller scale real estate opportunities, thus limiting the fund and an individual investors exposure to one specific project and the associated risks. A smaller more diversified pool of real estate assets reduces the potential risks usually associated with Real Estate development, such as builder declaring bankruptcy and increases in holding costs due to council delays. This allows us to offer an investment opportunity with lower overall risk and benefits that aren’t achievable through a traditional real estate investment.
Below is a comparison table showing the risk profile of a normal singular real estate investment versus an investment into the Remara Real Estate Fund.
| Asset Class/Risk Factor | Economic Growth Sensitivity | Inflation Sensitivity | Yield Dependency | Interest Rate (Duration Risk) | Project Risk | Finance/ Leverage Risk | Political Risk | Illiquidity Risk | Regulatory Risk |
|---|---|---|---|---|---|---|---|---|---|
| Private Credit (Traditional) | High | High | Mixed | High | High | High | Low | Medium | Low |
| Remara Opportunistic Development | Medium | Medium | Mixed | Medium | Low | Medium | Low | Low | Low |
Tactical Opportunities
Our tactical opportunities fund combines several traditional asset classes into one co-mingled pool of assets. Covering opportunities across financial services, financial markets and hard assets, our approach allows our fund managers to invest into multiple differing assets to create an uncorrelated investment pool. An uncorrelated pool means the individual assets basically move in different patterns, which allows a lower overall volatility rating, giving investors a more stable year to year return. It also allows compounding to do its work and generate long term wealth. At Remara we actively manage each individual investment, continuously making changes based on active markets and allowing investors the opportunities to gain exposure to high quality, blue-chip investments, without the limitations of specific mandates.
Below is a comparison table showing the risk profile of a normal global macro fund versus the Remara Tactical Opportunity/Global Macro Fund.
| Asset Class/Risk Factor | Economic Growth Sensitivity | Inflation Sensitivity | Yield Dependency | Interest Rate (Duration Risk) | Project Risk | Finance/ Leverage Risk | Political Risk | Illiquidity Risk | Regulatory Risk |
|---|---|---|---|---|---|---|---|---|---|
| Private Equity | Medium | Medium | Low | High | N/A | High | Low | High | Medium |
| Venture Capital | High | High | Low | Low | Low | High | Low | Extreme | Medium |
| Hedge Funds | Medium | Medium | Low | Medium | Low | High | Low | Medium | Low |
| Remara Tactical Opportunities | Low | Low | Low | Low | Low | Low | Low | Medium | Low |
All our investment opportunities are carefully crafted, individually managed, and based around our core principles. We believe in providing our investors with diversified, uncorrelated investment opportunities that focus on positively skewed risk/reward ratio. Premium asset opportunities that traditionally are not available to the individual investor. To find out more, contact one of our team today.
