Many investors have never been able to include alternative investments in their portfolios until now.
Institutional investors have long been able to obtain higher-than-average returns by investing in the alternative sphere; private equity, for example, has handsomely rewarded such investors.
Alternative investments have hitherto been the preserve of UHNWIs (Ultra High-Net-Worth Individuals) and institutional investors able to afford the high entry costs required for investing in hedge funds, private equity, venture capital funds and the like.
Most investors, though, have only had access to traditional asset classes such as equities, bonds, currencies and investment funds, which are all traded on regulated markets. The fundamental choice for the typical investor is either to buy an actively managed fund that, over time, will probably underperform the market due to the high fees involved, or to buy an ETF that will give a return just under that of the relevant market.
However, today’s technology-driven solutions offer new possibilities for investors who are dissatisfied with the products, returns and service they are offered by banks to seek other ways of investing their capital.
Below, we give three good reasons why alternative lending can enable the average investor to reap the same rewards as those enjoyed by UHNWIs and institutions.
1: Portfolio diversification
Diversification is one of the most important and fundamental factors to consider when constructing an investment portfolio. Without diversification, a portfolio is likely to suffer losses when markets move in an adverse direction.
Consider the following simple example: In order to diversify a portfolio of equities, an investor decides to buy high-yield corporate bonds because they yield more than government or mortgage bonds; however, the credit risk associated with corporate bonds is closely correlated with equities, which the investor is trying to diversify away from.
Alternative lending offers an investment that is uncorrelated with the main asset classes.
2: Geographical growth-market allocation
Similarly, investing in more property in the same area does not diversify a portfolio, but only buys more of the same type of risk, even though bricks and mortar may seem a safe investment.
An investor should be aware that spreading investments across geographical regions where growth rates are high helps to increase returns without adding risk. Again, alternative lending provides an opportunity to invest in such areas.
3: High returns
Last, but not least, alternative investment typically gives high returns to investors with a long-term commitment.
Alternative loan originators are generally willing to accept more risk than banks; they also have lower operational costs and smarter ways of using technology to collect defaulted loans. Consequently, many of these loan originators manage to significantly outperform traditional financial institutions.
Alternative lending offers ordinary investors the possibility of investing long-term like UHNWIs, enabling them to diversify portfolios, spread their investments into other geographical areas to gain a better asset allocation and enjoy higher returns – all-in-all, a multiple-win situation for the average investor.
If you are interested in diversifying your investment with alternative lending to obtain attractive returns, please visit our website quantrom.com or contact us for more information.
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Quantrom Limited, Limerick