(Investor's Chronicle) - The lure of things seemingly unattainable has great appeal, especially in investment. Ordinary folk love the idea of having the opportunity to invest where normally only the elite can: fine wines, classic cars, fine art, coins, stamps, intellectual property or, as we will examine in this article, music royalties.
In recent years it has become easier to invest in a greater array of so-called ‘alternative’ asset classes with funds emerging in sectors that allow private investors to buy ‘unitised’ investments in the likes of farmland, forestry, private equity, venture capital and a slew of less common commodities.
Some areas remain more difficult to access but, in theory, anything seen as having investment value/potential or capable of generating returns (income or capital growth) can be bought via a pooled, unitised investment. These are known as ‘alternative investment funds’. While well-established, regulation of alternative funds can be less rigorous than mainstream investments covered by the FCA but there is a specialist framework – the Alternative Investment Fund Managers Regulations – covering them and overall there is more risk investing here.
Another term encompassing non-standard investments is ‘uncorrelated’. Correlation is the connection between either one asset class and another or between an asset class and macroeconomic events. Correlation can be positive (eg rising house prices are good for housebuilders and estate agents) or negative (product shortages boost the supplier but harm the consumer). They can also be neutral (no impact of one class on another): these are uncorrelated asset classes. In practice, nothing is totally uncorrelated as there must be some driver mechanism or else the asset cannot make a return but in general uncorrelated means that the value of assets is likely to be impacted less by large equity market swings or macroeconomic shocks. This can help change the risk profile of a portfolio by making some investments potentially inert or counter-cyclical.
By Robin Hardy
March 3, 2022
