31-Dec-05
It is nigh impossible to scan a page in the financial press today without encountering an article or advertisement relating to alternative assets. The products in question might be referred to as ‘absolute return’ or ‘guaranteed equity’ but this is purely a matter of terminology – the interest lies in the underlying ‘alternative’ investments.
It is not the objective of this paper to distil all of this commentary into a couple of pages, instead it aims to focus on a specific definition of ‘alternatives’ and consider the market evolution that led to the present situation, all with a view to establishing some trends for the future. Investors’ needs and expectations are considered paramount throughout, but the likely impacts on financial service providers are perhaps more interesting. It is generally accepted that alternatives are now penetrating the ‘mainstream’ of investment management to some degree. This is a problematic concept as, technically, an investment should probably cease to be classified as alternative once it enters the mainstream. So, without getting wrapped up in semantics, it is firstly important to define which classifications are used as they can have a dramatic effect on any resultant conclusions.
As this article considers two axes – the mainstream market and alternative investments, it is firstly important to say that the two are intrinsically linked and that their definitions are largely driven by the part of the market studied. For example, a traditional European private banker and a North American pension fund manager will have quite different views on how to classify an agency mortgage backed security. For the sake of clarity then, it is important to firstly define our target as private client investment management.
It is frequently stated that it is easier to define what an alternative investment is not, as opposed to what it is, with the simplistic conclusion that any instrument outside of the broad scope of ordinary shares, bonds, funds and cash is alternative by nature. However, there are challenges to this approach; when does a traditional fund become a hedge fund, does the answer lie in the constraints applied? Is an ordinary stock alternative if it is sold short? Is it reasonable to consider all derivatives as alternative – does a simple index future have any relevant characteristics? …
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