As their name aptly suggests, alternative investments are an alternative to more ‘normal’ and common options of investing, such as bonds, cash, or stocks. In the case of traditional investments, the investor expects to make money through dividends and interest, whose value increases over time. With it, so does the value of the investment. That being said, investing in alternative vehicles can mean just about anything, from real estate, to artworks, to online property, to hedge funds, ETFs (an ETF is an exchange-traded fund), ETNs (an ETN is an exchange-traded note), and private equity.
Today’s post covers a few of these topics, with a focus on private equity, hedge funds, ETFs, IRAs, and investments into moneymaking websites. With dozens of important names present in the alternative investments market (GFG, HSBC, Greenwich, Tuckerbrook, Pioneer, Credit Suisse, BNY Mellon, Auda, Amundi, Equinoxe, Mizuho, Vine, or Lazard, to name but a few firms), this may confound the situation to the point where it becomes truly inaccessible for the average guy. Now, alternative investments have always been the prerogative of high net income earners, but with such liberalizing evolutions as the proliferation of mobile Internet access, we believe it is important to offer an accessible explanation of alternative investments.
What are alternative investments?
A single definition would be difficult to come up with since alternative investments are quite different in nature. Yet such assets almost always have a common thread running through them all: they come with low correlation coefficients, both in relation to equities, as well as to fixed income. The chart below, with data provided by Zephyr & Associates LLC, illustrates this principle, by showing how four distinct alternative investment instruments have low correlation to the equity market (viz. Russell 3000 stock index), but also to the bond market (viz. Lehman U.S. Aggregate Bond Index). Meanwhile, traditional funds usually correlate positively with equity.
Image source: Investopedia.com
Given their low correlation to both stocks and bonds, alternate investments come with lower systematic risks, which is the reason why many recommend vehicles in this category, as a means to diversify one’s portfolio. It’s also worth mentioning, though, that such an absolute return strategy is better suited for the negative market climate when traditional long-only equity funds are underperforming.
Another way of looking at various categories of alternative assets is to categorize them into non-directional (hedge) strategies and directional strategies. While the former offset positions in instruments like equity and fixed income, the latter offset classes like global equity, real property, or commodities.
It’s still important, though, to make sure that your alternative investments don’t interfere with IRA (Individual Retirement Account) regulations, since this may cost you your tax-deference status on said IRAs. Certain persons (the IRA owner, their spouse, ancestor, descendant, descendant spouses, investment advisors, custodian or trustees of the IRA, as well as enterprises like corporations, partnerships, and trust, in which the IRA owner holds a minimum of 50% interest) may not engage in certain transactions with the IRA. Such prohibited transactions may result in the IRA coming to be regarded as distribution. To avoid ending up with a prohibited transaction, it’s usually best to enlist the help of an ERISA or tax attorney for assistance.
Image source: l4wyer.com
Finally, it’s worth diversifying your investment portfolio with alternative assets, especially during times when the equity market is underperforming. Allocating assets this way is highly likely to outperform a portfolio, which mostly relies on equity.
How do hedge funds work?
In post-recession America, hedge funds are somewhat maligned in the aftermath of the recession. That’s because while a private investor can expect to lose money when the price of their financial instrument of choice fails, hedge funds employ sophisticated income-generating strategies, aimed at ensuring they will make money even when prices fall. At present, the largest hedge funds in America are Bridgewater Associates, with assets worth over $58.9 billion. JP Morgan Asset Management, Man Investments, Brevan Howard Asset Management, and others follow them.
In a hedge fund, staff in three essential types of positions, typically occupy the front office: marketing and sales, trading, and analysis. Hedge fund investment analysts research companies, financial products, and interesting markets to invest in, the sales and marketing department is in charge of convincing investors to bring their money into the fund, while the traders place trades, as the name of their position suggests.
How do private equity funds work?
Private equity funds operate by a stricter hierarchic structure than hedge funds. Typically, recruits will need to have at least an undergraduate degree to their name, though most equity funds require both a world-class MBA and some experience in investment banking. Analysts, who seek and identify targets for investment, usually occupy the bottom rung in the private equity fund hierarchy. They are followed by principals, who weigh in with a financial and legal analysis of the opportunities identified by analysts. Finally, originators lead private equity funds, have insights for the best deals, and are in charge with overseeing the entire trading process.
How do moneymaking websites work?
You can waste your energy trying to grasp the structure of a mutual fund, understand the latest IRA-regulating directive, or figuring out how to turn certain assets into liquid capital. Or, you could try one of the simpler alternative investments ideas out there: websites built to make money for you, over a specific span of time. For the purposes of this post, we’ll be focusing on passive and residual income streams only, i.e. content publishers, plus aggregation and creation sites, not e-commerce venues or other types of commercial websites designed to act as one step in the sales funnel of a single product or service.
The beauty of such an alternative investment vehicle is that it’s almost risk-free: for as long as Google acts as the largest advertising platform online, chances are that you will not default on your investment. There are plenty of solutions to monetize off a website these days, but, as always, the simplest ones work best. AdSense is a safe and established moneymaking resource for webmasters the world over, so why not turn it into a qualified investment for a fraction of your capital? The best part about AdSense is that it’s nearly risk free, provided you work with a good SEO expert who knows their keyword research tools. However, since it’s a Pay-per-Click ad revenue stream, don’t expect your website to monetize too highly from this alone.
Luckily, this is not the only way in which websites created by professionals, with the end goal of making money, actually make said money. Since we’re talking about content websites, let us break down how the moneymaking process works, based on the type of content you publish:
- Content created to attract organic traffic from specific niche keyword queries.
- ‘Viral’ content, which aims to monetize based on social media referral traction.
Content websites also attract traffic with the aid of other referral channels, such as emailing lists and guest posts with back links to the initial domain.
- All this constitutes great quality, free, informative, educational, and/or entertaining content, which is used as a showcase for relevant sales content. We’re talking legitimate, search engine-approved advertising methods, such as affiliation programs (monetized through affiliate sales links, affiliate product promotions, and/or affiliate product reviews), and ad banners (monetized via PPC, pay-per-1000-visitors, or pay-per-month).
Check out the rest of the website, as well as this handy guide to earning a residual income online for all the latest news on the topic. We would enjoy walking down this profitable street with you, as your investment advisors and partners.
What’s it like to work as an alternate investment analyst?
A highly dynamic professional environment, given the nature of the industry, often characterizes the professional life of an alternative investment analyst. People with such jobs work on a daily basis with types, classes, and forms of investment that are often radically different from fixed income and standard equity instruments. As outlined above, this can include just about anything from real properties, commodities, structured financial products, hedge funds, and more. One such field is timberland, for instance—and the CAIA exam, offered since 2002 by AIMA (the Alternative Investment Management Association) and CISDM (the Center for International Securities and Derivatives Market) aims to cover all these fields. The CAIA Association organizes many a conference for experts in this field, and also edits the Journal of Alternative Investments.
Image source: CAIA.org
There are currently 6,700 CAIA members, who have passed the exam and are mandated by the associations behind it to uphold a code of professional ethics. In this sense, the curriculum for the CAIA examination is divided into two distinct levels. Level I includes 8 topics (including real assets, hedge funds, commodities, private equity, and professional ethics, among others), structured into 200 multiple-choice questions. Level II includes 3 essay questions and 100 multiple-choice ones, in more sophisticated fields like hedge funds and managed futures, risk management, due diligence, and more. Current pass rates for March 2015 stand around their historic average levels, with 66% candidates having passed Level I and 68% having passed Level II. Some 40% of candidates are able to pass both levels on the first attempts.
How much does a CAIA alternative investment analyst make?
The short answer is “a whole lot of money”—though the kind of pay available to top earners is never offered to juniors right off the bat. To give you an idea, check out the chart of hedge fund and private equity pay below. Also, bear in mind that the top earner at John Paulson in 2010 brought home a $4.9 billion pay check that year, based on data from Absolute Return + Alpha.
Image source: eFinancialCareers.com
As for Chartered Alternative Investment Analyst (CAIA) Certification employees, the pay is not half bad either. Reports on PayScale state that investment analysts make in the range of $64,111 to $96,958 per annum, investment consultants earn from $89,250 to $175,500 each year, while portfolio managers can expect annual salaries of $67,500 up to $149,000.
Is the CAIA certificate exam worth the trouble?
There’s no single and simple answer to this question, because of the nature of breaking into private equity companies and hedge funds. By and large, such companies look at a cumulus of experience and academic credentials and/or qualifications. They then select the absolute elite from among their candidates, train them with a hands-on approach on the job and only thereafter consider them for promotion to senior level.
However, for an individual looking to break into the complex, yet rich industry of finance, the CAIA might be regarded as a less intensive CFA exam. The Chartered Financial Analyst examination covers many of the same topics, but requires 300 (as opposed to the CAIA’s 200) hours of study. Pass rates for the 3 respective CFA levels are lower than for the CAIA and all stand around 40%. There are fewer CAIA holders (6,700, compared to more than 118,000 with CFAs) and the employment rate is higher for those who pass the CAIA exam. Only 3% of CFAs end up in hedge funds and 5% in private equity; meanwhile, 26% of CAIAs work in one of the two above-mentioned types of companies.
Image source: eFinancialCareers.com
The top 5 alternative investment companies to work for
- Citigroup Alternative Investments
A full-time analyst for the private bank sector of the institutional clients group at Citi is expected to develop financial models, assess investment opportunities for clients, present them, and developing new businesses. Applicants are expected to have earned a B.A. in any field, with at least a 3.4 GPA.
- Goldman Sachs Alternative Investments
Working for Goldman Sachs’ Investment Management Department as a Financial Analyst in the Private wealth management sector involves maintaining relationships with the very rich, their families, foundations, and companies. The job effectively consists of teaching these rich how to stay rich or get even richer, based on their tolerance to risk. PWM analysts offer products and services in this area, including trust fund and private banking services.
- Morgan Stanley Alternative Investments
As an Investment Operations Analyst working for Morgan Stanley’s Investment Management Operations department in New York, one is expected to be familiar with Bloomberg, and also to have at least 3 to 5 years of experience in the field. The job includes security reference and product data operations issue resolution, including enriching and reviewing security reference data.
- BlackRock Alternative Investments
BlackRock, which has a $4.652 trillion AUM at the end of December 21, 2014, employs over 12,200 staff in over 30 countries. Analysts for Alternative Products Administration teams handle accounting supervision, financial reports, and administration for some of the most expensive alternative investment vehicles the company provides, like single manager hedge funds and other structured products that Black Rock manages. They require degrees in accounting and prefer CPA designation.
- Merrill Lynch Alternative Investments
In the U.S. BOFA Merrill Lynch outsources its private wealth advisory services to the Bhatia Group, currently located in Chicago and serving private and institutional clients with at least $10 million in assets that can be invested in their name. Raj Bhatia, one of America’s top financial advisors, according to Barron’s and the Financial Times, runs the company. In terms of private wealth management, they offer portfolio administration services, investment management consulting, stock risk management, advice for philanthropic giving, and retirement planning, as well as access to any conferences for thought leadership (and more) organized by the Merrill Lynch firm.