Pension Funds Shoveling Money Into Alternative Investments

Pension funds have steadily been increasing their allocation of capital to alternative investments, largely because of the asset class' ability beat rising inflation and incur less risk than traditional investments. According to a recent report by Cliffwater LLC, an adviser to institutional investors, between 2006 to 2012, State pension funds more than doubled their allocations to alternative investments, like private equity, real estate, hedge funds, hard assets and commodities. Accumulating almost $600 billion in assets, these nontraditional investments now comprise 24 percent of public pension fund holdings. Where did the capital come from? It would seem that the funds dropped their investments in stocks to 49 percent from 61 percent, over the last six-years.

The International Monetary Fund (IMF) released a report in late 2013 that suggested that over the course of the last 10 years, the average U.S. public pension fund earned a return of 6.4 percent a year. Although regarded as very healthy by some, it is clearly not enough to meet the 8 percent return that is guaranteed to government employees. In an effort to take pressure off the State budgets that must cover the repeated losses, the IMF revealed that many State pension funds have been moving billions of dollars to alternative investments, that are promising to deliver much higher yields with much less risk.

It has become increasingly evident that in the uncertain global economy, alternative assets have become more appealing (than traditional assets) to both pension fund managers and institutional advisers. Although there is no guarantee that every alternative asset will consistently outperform traditional assets, for now State pension funds have good reason to support a move toward investing in alternative investments.

Many Alternative Investments Have Proven They Build Wealth

For most investors, their primary objective is to get a return on investment with the least amount of risk and stress involved. Over the last ten years, the repeated uncertainty in economic markets has led to lower returns across many asset classes. Traditional equity investments, such as bank deposits and bonds, have fallen to record lows, prompting investors to use alternative investing strategies like crowd-fund investing, commodities, private equity, collectibles, etc.; to build their portfolio and personal wealth.

Alternative investments such as crowd-fund investing can be a significant source of liquidity for small cap investments. In places like Australia and many parts of Europe, including Austria, Germany, the Netherlands, Switzerland and the United Kingdom, crowd-fund investing has been incredibly successful. The models applied to this investment strategy range from equity to quasi-equity and subordinated loans, sometimes accompanied by the addition of equity. In most instances, these types of investments provide an ongoing cash incentive to investors, while also providing a longer term potential. Not to be forgotten, there are many other forms of alternative investments, such as hard assets; that have proven to deliver consistently better returns in today's uncertain economy. Among the many benefits of hard assets, these investments have an intrinsic value and (in most instances) offer investors a low-risk investment, with long-term capital growth.

Despite the higher than normal volatility, especially for shares exposed to growth markets, there are alternative investments that are producing steady returns for investors; quarter after quarter. Moreover, for investors with an income requirement, who are content to allow market cycles to pass but prefer lower volatility, income producing assets are one of the best available options; particularly in today's risky global markets. Time and again, these alternative investments have proven that they can provide investors with less risk and more returns over the long-run.

Affluent Investors Use Alternatives to Guard Against Risk

Although equity markets may have hit all-time highs, the investment community has not forgotten the meltdown in 2008 that resulted in a stunning 40 percent loss, and as such many are asking their money mangers and investment advisers to help protect their wealth against another fallout. In response, fund managers are shifting their client's assets away from the "bubble-prone" stock market and into alternative assets, like real estate, commodities and shipping container investments; that have repeatedly demonstrated that they can accommodate for stock and bond market risks.

"Alternative products are attracting interest from retail and institutional investors, as both are increasingly looking for portfolio diversification, enhanced returns and risk management,"- Associate Director at Cerulli Associates.

In fact, a research study by Strategic Insight reported that the most important reason for the recent move away from stocks by affluent asset managers, has been the need to "diversify their investment holdings; so as to protect their clients' assets." Moreover, the study also concluded that the amount of money invested in alternative (or nontraditional) investments, particularly those offerings that have little or no correlation to the stock or bond market, will rise considerably over the next five years.

"Alternative funds have more than doubled since 2008 and could do so again in the next five years,"- The Strategic Insight Report.

The study by Strategic Insight also forecast that the use of alternative assets will go from 2 per cent of total mutual fund assets to 14 per cent over the next decade, with the amounts in alternative mutual fund assets likely growing from approximately $245 billion currently, to $490 billion in 2018.

Whether the immediate state of investment anxiety is the result of the recent U.S. government shutdown and/or the historically low interest rates, investors are choosing to keep large amounts of cash as well as alternative assets. In doing so, investors can avoid the uncertainty of the world's stock and bond markets and stay ahead of rising inflation.

Alternatives To Consider With Interest Rates At Record Lows

With interest rates at record lows, stocks and bonds are finding it extremely difficult to become stable and produce healthy returns with minimal risk for the investor. As a result, investors have shifted their focus to alternatives, which essentially consist of anything but the traditional investment vehicles such as stocks, bonds and cash. There are plenty of alternatives for investment-seekers to invest their money in, assuming they take the time to learn about investments and thoroughly research the risks associated with each option, to determine which opportunities are a worthwhile investment.

With that being said, when interest rates are at record lows and the investment community is faced with tumultuous markets and economic uncertainty, investments in foreign exchange, hard assets, exchange traded funds (ETFs), as well as options and futures, can present profitable opportunities for investors to capitalize on. Here is how:

Foreign Exchange: Trading foreign exchange will allow you to profit when you speculate on the value of one currency compared to another. Many Forex traders trade on margin, where their funds only cover a percentage of a trade’s total value and they essentially borrow the rest from their Forex providers. This method can be extremely profitable if executed correctly and investors understand the concept and can decipher economics movements.

Hard Assets: These alternatives include commodities such as oil, gold, silver, natural gas or any other investment with intrinsic value. These alternatives provide minimal risk to the invest in times of economic uncertainty and thus represent a popular trend in modern investing. In addition, hard assets like shipping container investments, are excellent courses of inflation hedge, again representing a need in today's global economy.

Exchange Traded Funds (ETFs): These alternative investment offerings are a lot like managed funds, and as such, very often hold a combination of traditional investment assets like stocks, commodities and/or bonds. This common investing strategy generally aims to replicate returns of an index, or another underlying asset, at a much lower cost. In addition to this, Exchange Traded Funds are traded like shares on the major global markets, thus they are widely regarded as much easier to invest in and easier to liquidate, than actual managed fund investments.

Options and Futures: These types of investments are alternative ways of trading assets like shares, currencies, indices and commodities. Options and futures allow an investor to buy or sell the share on a specific date in the future, at a specific price. This essentially means that instead of buying a share now and holding it for say, a year, you can a premium for the right to buy it at a certain price anytime. Nevertheless, the risk is that investors are betting that the price will rise.

With increasing risks associated with investments and uncertainty looming over the global economy, it is paramount that today's savvy investors carefully consider all of their investing alternatives before making their final investment decision. As mentioned above, Forex, ETFs, hard assets, options and futures can provide dependable ways to overcome investing challenges in difficult markets, and have proven they can deliver steady investment returns if investors do the proper research and carefully consider the amount of risk they can bear.

Alternatives Expected to Comprise 14% of Mutual Fund Assets

Asset managers around the world, who handle both institutional and retail accounts, have been increasingly focused on alternative assets. In fact, it was recently reported (Cerulli Associates) that between 8 and 10 life insurers said that they were actively considering increasing their allocation of assets toward alternative strategies, as they look for dependable sources of additional yield. Moreover, in the October 2013 report from Cerulli Associates, the data suggested that alternative mutual funds can be expected to comprise approximately 14 percent of all mutual fund assets, in the coming decade.

Since the financial crisis of 2008, institutions and advisers have been under immense pressure to increase returns while keeping exposure to risk unchanged or at least held at a minimum. As a result of this increasing pressure, many have shifted their focus the alternative assets that have been steadily attracting interest from retail and institutional investors seeking portfolio diversification, enhanced returns and (of course) manageable risk. In addition, the report's extensive research reveals that more than 50 percent of surveyed asset managers suggested that alternative investments are either more important than other initiatives or the most important initiative, both within the retail and institutional environment. Moreover, 60 per cent of managers have said the same ingredients will be followed for the portfolios of their high net worth clients, as well.

Most of the international investment community has taken notice of the fact that alternative investments have been growing in popularity exponentially over the course of the last couple of years. As a result of the increase in demand, the value of many alternative assets has been increasing steadily as well. Investors have noticed this too, especially when alternatives are compared to the S&P 500. This is especially appealing to investment-seekers, as they look for opportunities that will protect their investment principle and beat rising inflation, as well as address the skyrocketing cost of living.

What Are The Types of Investment Risk When Investing?

People with less disposable income tend to be, by necessity, more risk averse. On the other hand, day traders feel as though if they are not making trade after trade everyday, there is a problem. In most instances, these high-volume traders are motivated by the belief that more risk can equate to more profits. Albeit true in some instances, it is wise for investors to completely understand that investing involves risk and that there are different types of risk that can adversely affect their investment return. With that being said, here are 8 risk factors to consider, before pursuing an investment opportunity of any kind.

Foreign-Exchange Risk: When investing in foreign countries you must consider the fact that currency exchange rates can change the value of the asset as well.

Credit or Default Risk: This is the risk that a company or individual will not be able to pay the interest or principal on its debt obligations. This type of risk is very concerning for investors who hold bonds in their portfolios.

Systematic Risk: A significant political event, for example, could affect several of the assets in your portfolio.

Unsystematic Risk: An example is news that would affect a specific stock, like a sudden strike by employees.

Country Risk: This is the risk that a country will not be able to honor its financial commitments. This can also harm the performance of other investments in countries the default country has relations with.

Political Risk: This represents the financial risk that a country’s government will suddenly face if it changes its policies.

Interest Rate Risk: This is the risk that an investment’s value will change as a result of a rise/drop in interest rates. This risk affects the value of bonds more so than stocks.

Market Risk: This is the most familiar of all risks. Also referred to as volatility, market risk is the day-to-day fluctuation in stock market prices.

An aggressive investor, or one with a high risk tolerance, is someone who is willing to risk losing money; to potentially earn a better return. A conservative investor, or one with a low risk tolerance, often prefers investments that are more likely to maintain the original investment value. It is important for you to identify what kind of investor you are and determine how much exposure to risk you are comfortable with, before investing. This approach will increase your odds of choosing the investment offerings that can deliver long-term investing success and profits with less associated risk.