Would Alternative Investments Be a Good Long-Term (10+ Years) Strategy?

Should a 10-year investment strategy incorporate alternative investments?

Alternative investments that might include art, classic cars, rare diamonds or raw land have performed well in the past decade. Can the asset growth continue?

The performance losses of hedge funds in 2012 set off warning bells for many investors as they look for smart investments in 2013 and beyond. As Reuters reported in July 2012, “performance losses at many funds resulted in total industry assets shrinking.” The financial news agency quotes Hedge Fund Research, which noted the average fund dropped by 2.7 per cent in the second quarter of that year alone, a time marked by net outflows in the billions from all types of funds. Some analysts attribute this to the sheer proliferation of hedge funds, reducing their vaunted performances earlier in the nineties.

All investing involves risks and rewards, ideally in commensurate quantities. As traditional market traded securities have proved volatile and ultimately disappointing since the financial crisis of the past several years, many people have turned to alternative investments. These include hedge funds, but can include art, fine wine, classic cars and precious metals, as well as real estate and land investments, among others. Most of these have performed well against the stock market – but will they in the decade to come?

Of course, the owner of the crystal ball that holds the answer would ultimately be the richest person on earth. Lacking that, the best we can do is to look at the history of alternative investments and factors that may favour or diminish their prospects in the years to come:

• Wine – Bordeaux reds tracked by the Liv-ex Fine Wine Investables Index between 1999 and 2009 found a 138 per cent return on such vintages as Lafite Rothschild 1982. Of that variety, 12 bottles purchased for £2,613 in 2000 sold nine years later for £25,500. In other words, pick your wines wisely and you can do extremely well.

• Art and jewellery “passion” – Fine art requires an expert, as with virtually all investing, to predict which artists may perform well over time. They can prove to be spectacularly wrong: Mega-selling artist Damien Hirst, whose provocative use of dead animals and even a human skull (encrusted with diamonds) has earned him US$350 million in his relatively short career thus far, saw some of his earlier work plummet in price by 30 per cent in 2012. Yet, London-based Emotional Assets, which promotes itself as the “convergence between collecting and investing,” is part of a category known as “passion funds,” which claim returns that best investments in stocks and bonds. KPR Capital, a Cayman Islands investment firm launched a rare diamonds fund that returns between 15 and 17 per cent per annum in 2007 and 2008.

• Classic cars – The largest classic car auctioneer in the UK, Coys, says the value of cars – including the brands Ferrari, Mercedes Benz, Porsche and Aston Martin – has gone up since 2000 by as much as 200 per cent. That said, a firm spokesman told The Guardian that a Jaguar XJ220 that sold for £120,000 has not increased in value at all, and a Ferrari Daytona sold in 2008 for £190,000 was worth £30,000 less in 2009. Again, expertise on the part of a buyer or a buyer’s consultant is advised when looking at this type of investment.

• Raw land – Land that is poised to be rezoned – typically, from agricultural or commercial purposes to residential – offers the most likely upswing in value. Because the characteristics of land are so variable, it is difficult to cite broad investment returns from one location to another. But advice and management of the investment by seasoned property fund managers are more likely to yield a favourable return. The 7 per cent growth rate of the UK population over the past ten years while housing stock did not increase commensurately all suggest that land investments should perform well for the foreseeable future.

The characteristics of best performers in almost all alternative investments include a finite supply, attractiveness to foreign investors from developing countries (China, in particular) or increasing natural demand (e.g., the increasing UK population needing housing).

No investment should be undertaken without the counsel of a personal financial advisor.

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