Alternative Investments: Minimising Risk in Unknowns

Can the Risks Inherent in Alternative Investments Be Minimised?

The nature of alternative investments such as land makes it difficult to quantify risk. You can overcome the unknowns by understanding the investment opportunity.

The fundamental strategies for investing – minimising risk while maximising returns – are almost universally held and apply to nearly every type of investment. But the uncertain nature of most asset classes in the past few years has radically altered how investors have gone about achieving this. So what is the state of affairs now?

A global survey compiled in 2012 by Towers Watson in conjunction with the Financial Times found that, in general terms, alternative investments are attracting more investment than in the past ("alternative investments" is a term typically applied to managed futures, hedge funds, private equity, exchange funds and real estate). The report attributes a perceived instability in the global financial system, as it affects stocks and bonds, as the reason more assets are being allocated to alternative investments and investment funds.

The leading asset class within the broader category of alternative investments is real estate. According to the report, about 35 % of funds being invested outside stocks and bonds are allocated to real estate, followed by private equity (22%) and hedge funds (21%). Infrastructure and commodities draw about 3% each of the total of about $3 trillion (£1.9 trillion).

The fact that the largest portion of investments is drawn to land suggests that the return will be maximised while risk is minimised. What is it about land that makes this happen? Several factors are in play:

• Natural population increase ultimately leads to land value appreciation. Particularly in the developed world, the matter of supply and demand is the ultimate determining factor. According to the Towers Watson report, “The global economic crisis has spurred the vast majority of investors – both private and institutional – to readdress their asset allocation strategies … [such that they] align their portfolios with basic trends in underlying fundamentals such as population growth and economic expansion in emerging economies.” In countries with a net increase in population from immigration and a high birth rate, that becomes doubly so.

• Land has strategic locations. As industries and local economies shift, so too does the value of land. When a region attracts one or several companies, an employment base and a need for housing will both rise in the vicinity.

• Land use can be managed to reduce risk. When public officials can be shown the value of rezoning an area, this can significantly add to the value of the land therein. Land investment managers with land-planning skills, land development acumen and land site assembly analytical tools are the best equipped for containing land investment risk – and increasing its reward.

All land investment in the UK comes with some risk, but the most strategic land development organisations are satisfying individual and institutional investors who may be unhappy with their more traditional alternatives. For more information, speak with your personal financial consultant.