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Editorial: Thoughts on Alternative Investments |
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Alternative investments are of increasing interest to wealthy households. Despite this interest, relatively few investors feel they truly understand alternatives, nor are they able to define them. In addition, their assessment of inherent risk in an investment is directly related to their understanding of such investments. For example, the affluent don’t understand hedge funds so they consider them very risky. Conversely, they have a greater understanding of private equity, so they consider it a much less risky investment.
 Financial industry and consumer definitions are also inconsistent. In our focus group and other research, investors consistently define “alternative” investments as real estate or international investing. For the most part, investors define “alternatives” as investing someplace other than in the stock market. Not typically the same definition used by the industry.The affluent have an ongoing interest in real estate investing, despite the market ups and downs, because they feel it is an investment not driven by the equity markets. International investing is also seen as a way of broadening their investment horizon. In fact, over 30% of investors expressed interest in international investing in our most recent survey (completed Q4’06 and Q1’07). It will be interesting to see if this interest has declined in relationship to the rough ride the international markets (as well as the U.S. market) have taken in recent weeks.Finally, there are many affluent investors interested in true alternatives (hedge funds, private equity, venture capital, etc.) Most of these households hold about 5 to 7% of their assets in these vehicles, and that amount has not changed dramatically in recent years. In most cases, these investments have not been purchased through their primary advisor, but often through a referral network of friends and acquaintances. - Catherine McBreen
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High Net Worth Advisor Insights Newsletter April 2008
