Alternative Investments:  A Substitute Investment Vehicle?

Using alternative investments as a substitute to the long-established stock and bond investments can alleviate some of the traditional investment volatility typically found in the stock market.  In addition, many alternatives such as real estate, private equity, and hedge funds will outperform customary stock investments, albeit with less liquidity.  In addition, a few alternatives like hybrid insurance products may one day replace the ever-shrinking pension plan once used for retirement.  Nonetheless, there appears to be a growing need, not only in mature markets but also in emerging markets, to supplement investor’s retirement with alternative investments which offer a greater chance of asset returns.  
Sebastian, (2014) explores alternative investments by comparing their risk and rewards of alternative investments such as private equity, real estate, and hedge funds.  The author discovered not only is there an explosive growth of alternative investments, but that these alternatives typically outperform their traditional stock brethren. However, Sebastian, (2014) did discover a higher risk with alternative investment primarily because of their inherent nature of illiquidity.  Even so, not only should individual investors consider alternative investments as part of their overall investment portfolio, institutional investors are also seeking the higher returns of alternative investments to allow their pensions to stay solvent (Sebastian, 2014). 
Looking at more traditional characteristics of some alternatives, Ciumas and Chis, (2015) discuss the conservative nature of an alternate investment called unit-linked life insurance.  Basically, this study is a attempting to present a theoretical and empirical evidence to support unit-linked insurance as an alternative investment product commonly used in Romania (Ciumas, and Chis, 2015). In the United States, we commonly refer to this type of product as a variable life insurance or variable universal life insurance product. A unit-linked life insurance product may emerge, as it did in European and Asian countries, as a replacement to the traditional pension plans no longer offered by many companies because of the benefits of this product.  These plans offer survivor benefits (Life insurance) along with an investment component.  Of course, our government has yet to offer favorable tax treatment of this type of mixed investment, especially when the contract becomes lopsided in favor of the investment side of the equation.  Today, we must still contend with the risk of the dreaded "Modified Endowment Contract" aspect of this product.  Naturally, emerging markets have seen a tremendous influx of unit-linked insurance products, however; we may also discover this product is having an even greater impact in mature markets such as the United States. 
The alternative investment arena is no longer a playing field for the wealthy.  On the contrary, the adoption of alternative investments is rapidly expanding in both emerging markets and the United States.  As a matter of fact, our country is "slow on the take" for implementing alternative investments product mixes within an investment portfolio.  Many European countries are already looking past the "fiduciary" adoption, which the United States is currently dealing with, to more sophisticated alternative investment strategies. Needless to say, operating in a low-interest rate environment only exasperates investor’s efforts and leads them to explore other investment vehicles. Alternative investment products and strategies may provide the answer investors are looking for.       As always, let me know if I can help

Gerald House

References

Ciumas, C., & Chis, D. (2015). A comparative analysis between unit-linked life insurance and other alternative investments. Retrieved from https://ideas.repec.org/a/cbu/jrnlec/y2015v3p27-36.html
Sebastian, M. D. (2014). Go big or go home: The case for an evolution in risk-taking. SSRN Electronic Journal. doi:10.2139/ssrn.2114428


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