Luxembourg, March 2021
Shane Meredith : Why wealth managers need to embrace alternative investments?
Investors worldwide and especially HNWIs are increasingly turning to alternative assets and strategies, says Shane Meredith, head of sales for the Asia-Pacific region at SuisseTechPartners, amid dissatisfaction with traditional investments and the prospect of higher returns.
The popularity of alternative investments is growing because of rising distrust of traditional bond and equity markets. The media is also driving interest in alternative investment by highlighting the growth of Bitcoin and the billionaires who invest in it.
An alternative investment is a financial asset that is not based on stocks, bonds or fiat currencies. As a rule, alternative investments tend to be illiquid and are often unregulated by governments.
Wealth managers have traditionally cautioned against alternative investments precisely because they are illiquid, which makes them potentially high-risk because there is no way to cash out of most alternative assets quickly.
Popular alternative investments include private equity, private debt, hedge funds, real estate, crypto-currencies, commodities, collectibles such as artwork or jewellery, as well as structured products such as credit default swaps and collateralised debt obligations.
Wealth managers need to understand and offer alternative investments because demand is growing. PwC analysts predict that the value of worldwide alternative assets will grow from $10.1 trillion in 2016 to $21.1 trillion in 2025.
Interest could be particularly high in the Asia-Pacific region, where data provider Preqin forecasts that the value of alternative investments could grow from $1.62 trillion in 2019 to $5 trillion in 2025.
« PwC predicts that the value of worldwide alternative assets will increase from $10.1trn in 2016 to $21.1trn in 2025, while growth could be even faster in the Asia-Pacific region. »
Why high net worth individuals like alternative investments
For various reasons, many high-net worth individuals find alternative investments attractive.
Investors often have more control over alternative investments; private equity and debt can give investors high levels of ownership or economic influence in companies.
Ownership of collectibles, commodities, real estate, and crypto-currencies can offer investors total control over the asset. Many HNWIs are more comfortable owning assets such as gold, works of art or real estate outright.
Private equity, hedge funds, private debt, and structured products can give investors early access to new companies and technologies. Venture capital investors are always on the lookout for tech start-ups that could become the next Facebook. Private equity is the only way to invest in some popular companies that are not yet public, including Elon Musk’s SpaceX.
Some alternative investments can deliver higher returns than listed securities, while assets such as real estate can provide investors with tax advantages in some countries.
Ego can often plan a role in HNWIs’ interest in alternative investments, enabling investors to boast that they have an interest in a hedge fund or equity in a start-up. All wealth managers need to understand alternatives because clients will increasingly be asking about them, especially crypto-currencies.
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