Alternative investments such as strategic land should be comparatively evaluated.
While fraught with apples-to-oranges comparisons, would-be property funds investors should consider all alternative investments.
The Reuters news agency reported in October 2012 that the lustre of hedge funds is diminished. The reason, according to one prominent financial advisor cited in the story, is that hedge funds basically became too popular. They attracted institutional investors that have effectively reduced risk taking. While hedge funds gain on market inefficiencies, those inefficiencies are effectively “ironed out” by the proliferation of participants in this type of asset – ironically reducing the net return from the funds.
The primary reason investors went to hedge funds in droves over the last several years is because of the poor returns they were finding in traditional market-traded stocks and bonds. So what about other alternative investments? Do land, developed real estate, precious metals, art and antiques (including antique cars and rare coins), commodities, energy or natural resources yield managed risk and above-market returns? Consider the news on each (as of the third quarter 2012):
- Gold – After rocketing to historic highs in mid-2011, the only investors who are assured a good return on their investments are those who purchased the precious metal in 2008 or earlier, according to the head of a private banking firm.
- REITs – Real estate investment trusts are tied to large portfolios of developed or developing properties, primarily commercial buildings. The natural fortunes of REITs rise and fall with the markets, tied both to vacancy rates (which roughly correlate with the market) and the general performance of stocks and bonds.
- Undeveloped land – Strategic land investments, approached as property funds, allow small groups of investors to work with a land development advisor to convert unbuilt tracts to more productive uses. With the UK population increase (7 percent in the last decade) and housing shortage, market demand for housing should buoy asset growth in this category.
- Antiques, rare coins, art and antique cars – For the aficionado, rarities such as these can be an enjoyable avocation as well as a good investment – spectacularly good in some instances. Emerging wealth in China and India is placing upward pressure on the finite supply of rarities. But each investment must be made with expertise. Whole movies have been produced around art heists, rare book forgeries and falsified provenances of Stradivarius violins, telling the sad tales of rarities investments gone wrong.
- Agricultural commodities – Climate change is a significant factor relative to agriculture, with drought plaguing some areas and excess rain, shortened growing seasons and premature spring hitting others. FarmingUK.com reports, “The poor  UK harvest compounds a series of challenging weather events for farmers around the world, most notably drought in North America. The resulting tight supplies of many feed grains have driven up the prices of agricultural commodities around the world. These UK harvest results will do little to alleviate the global dynamics of commodity prices, with the prospect of relatively high commodity levels through to 2013.” What is bad for consumers may be better for investors, but the inherent uncertainty of weather is unnerving to many investors.
- Energy – Volatility defines the world price of petroleum, and uncertainty has led key players in the offshore wind industry (General Electric, Doosan Power Systems and Vestas) to shelve plans in 2012 to build turbine capabilities in the UK. “Renewable energy in particular needs the policies that are investment grade,” says Dr. Rob Gross, director of the Imperial College Centre for Energy Policy and Technology, who argues that carbon pricing will not be sufficient to drive demand for renewable energy development. Political factors cloud one’s vision as to what might happen next.
Alternative investments can provide significant asset growth, but clearly one needs to approach them with expertise. Every investor’s goals, timing and wherewithal varies, therefore it makes sense to weigh personal variables with the advice of a personal financial counsellor.