Investment, generic
Whether art, baseball cards or hedge funds, HNIs in the Gulf and elsewhere do have choices on where they should seek out alternative investments. Image Credit: Pexels

For some high networth individuals, a quarterly report on the performance of their holdings and an occasional check-in of their wealth manager is all they require. Fair enough - not everyone is interested in financial markets.

For a growing number of people, getting involved in the nuts and bolts of investment decisions is increasingly attractive as their understanding and level of sophistication grows. This can be seen among ultra-high networth investors (those with $20 million or more to invest), for whom about 50 per cent of their portfolios are in so-called alternative investments, which include almost anything that isn’t listed equities, bonds or currencies, according to private equity firm KKR.

That can comprise collectibles, such as baseball cards, cars and art; commodities, like precious metals, real estate, private equity and private credit; or hedge funds.

Where ultra-HNIs lead, HNIs (those with $1 million or more of assets) tend to follow. They had 26 per cent of their wealth invested in alternative investments in 2020, up from 22 per cent in 2017, KKR says. Institutional investors are also upping their allocations: 81 per cent of those surveyed by investment data company Preqin in 2020 said their funds would dedicate more to alternative investments by 2025.

Globally, alternatives under management have risen from $7.9 trillion in 2013 to over $10 trillion in 2020 and expected to reach $14 trillion by 2023, according to Preqin. For many, alternative investments sound complex and risky. Surely, hedge funds and commodities are highly volatile.

Think diversity

On the contrary, alternative investments can bring diversity to a portfolio and, because they are often not correlated with equity markets, allow investors to hedge against those risks.

That is particularly relevant at the moment as inflation concerns lead to a sell-off in both listed equities and bonds. Commodities and tangible assets, such as real estate, often perform well during periods of inflation. For a real estate asset, so long as occupancy rates remain high, swings in market sentiment are unlikely to greatly affect it.

How to get access to alternative investments? Buying and selling property or art is a long-winded and time-consuming process and, for many investors, the idea of allocating so much of their capital into a single asset that may be hard to sell at short notice is not desirable. In fact, liquidity is one of the main risk factors to consider when investing in alternatives.

However, liquid alternatives to traditional alternatives are making such investments more accessible. Through trusts, funds and listed entities, assets such as real estate, private equity and hedge funds are available not only to HNIs, but to retail investors.

One of the first such areas to open up to a broader segment of investors was real estate, with the creation in 1960 of the real estate investment trust. REITs could give smaller investors access to commercial real estate in a similar way to buying a publicly traded equity. They arrived in the Middle East in 2010 and such products became available in Saudi Arabia and Bahrain in 2016 and Oman in 2018.

Mutual funds also offer liquid access to alternative investments. Long-short equity funds include equity securities and derivatives that combine long and short positions through exchange-traded funds (ETFs) and options. Non-traditional bond funds use active investment strategies to try to beat the returns of traditional bond funds.

A world of alt possibilities

Depending on the flexibility given to the fund manager, that might involve buying high-yield foreign debt, for instance. Market-neutral funds look to minimize risks by decoupling investments from the trajectory of stock or bond markets. They can achieve this in a variety of ways, such as taking matching long and short positions and increasing asset diversity.

Managed futures funds mainly use derivatives - such as futures, options and swaps - to invest in everything from metals to grains, equities, foreign exchange and bonds. Multi-alternative funds use a combination of strategies, such as those just described and others, including volatility, multi-currency and bear-market.

The ability of such funds to buy and sell assets in the Middle East are limited by restrictions on shorting and other derivatives, but they are accessible to regional investors looking to diversify their global risk profiles. Such funds have become even more accessible with the rise of ETFs, many of which offer exposure to such strategies by buying shares in them.

Then there are publicly traded alternative fund managers, which give investors a proxy for their performance through listed equities. For instance, private equity, traditionally reserved for institutional and HNIs, can today be accessed through the stock market in the form of shares in companies.

The number of ultra-HNIs in the Middle East is expected to increase by some 25 per cent from 2020 to 2025 to more than 37,000, according to Knight Frank. They are no longer the only private investors with access to the most cutting-edge investment vehicles.