Many advisers in the offshore community are approached by numerous fund houses to invest in new funds – and the majority of these promote themselves as ‘alternative’ investments.
The benefits are always clear in that returns are non-correlated to global equity markets and provide for a smoothed return with the benefit of reducing overall portfolio volatility through asset diversification – exactly what advisers are looking for in the current investment climate which has seen conventional equity prices fall.
There are nonetheless key risks that advisers should be aware of when investing in such funds.
Liquidity risk is the biggest risk, as most of the underlying holdings for such funds are illiquid, meaning they are generally monthly priced.
Operational risk is the risk that the fund is not doing what they are supposed to and not running in accordance to their investment mandate. This creates reliance on the fund’s management, administrators and auditors relaying accurate information.
Fraud risk is where illegal activity takes place which is not in the best interest of the investor and the funds jurisdiction can in large part influence the likelihood of this happening.
The above risks are unquantifiable and advisers do take a leap of faith when investing in these alternative funds. It is worth noting that these risks are outside of the direct control of advisers and so they must tread carefully and seek physical assets that support the valuation of assets within the fund.
By Harpreet Sajjan, Head of Portfolio Management, Platinum Financial Services
