Financial homeopathics anyone?

While conventional and traditional medicine remain poles apart, alternative investments seem to be converging with the more traditional kind setting the market for growth.

The term “alternative medicine” initially evokes pictures a snake oil or quackery before focussing on a good osteopath, acupuncturist or naturopath. Mention “alternative investments” and investors’ eyes light up. That is unsurprising: the rout in interest rates has caused stampede to find better-yielding assets. While some are currently unsure which way to stampede, the market is starting to give a clearer direction.

The search for alternatives to equities, bonds and cash bonds is wide- ranging. In the inflation of the 1970s investors could be seen holding wine glasses to the light at their Mayfair wine merchants, inquiring as to the provenance of an antique, meditating a Monet at Sotheby’s or peering at a Penny Black through a magnifying glass. Just about anything that would not fall victim to corrosive inflation seemed to be a good bet.

Caribbean soirée

More recently, pursuit of capital protection has been replaced by the search for yield. Wealth managers, inhibited by regulatory constraints in Europe and the US, migrated to places like the Cayman Islands and British Virgin Islands. The freedoms in these jurisdictions led to an innovative and creative era for investments where large fees for managing high-yielding hedge funds became de rigueur. Hedge funds morphed into alternative investments that included forest and agricultural land, financial derivatives, private equity, carbon credits and even exploring opportunities in crypto currencies.

Ironically, problems in paradise arose when innovation and creativity strayed beyond propriety. Too-lax regulation tarnished the reputations of these financial centres raising concern among investors that their own reputations would be tarnished by association.

The thoughts among asset managers also turned to how these profitable investment structures could be offered to a wider customer base.

However, jurisdictional, liquidity and distribution issues inhibited development.

Landlocked island

Now a significant change is underway that will give retail investors the same opportunities to diversify their investments and reduce the correlation of their with traditional assets. With the wider adoption of the EU Alternative Investment Fund Managers Directive and the fall out of reputational damage in the Caribbean, places like Luxembourg have seized the baton.

Luxembourg lays claim, not only to being home to 75% of internationally traded funds, but to already having 20% of assets under management in the form of alternative investments. Investment managers in the principality have been hiring experienced money managers to structure, create and most importantly, develop distribution channels for alternative investments taking them into the mainstream.

The trend is underwritten by research that shows the expected global growth of alternative investments rising from $10 trillion in assets today to $18.1 trillion by 2020.

Alternative investments look to become conventional. But alternative medicine may take a little longer to converge.

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