An Introduction to Alternative Investments

  1. What are Alternative Investments?

In recent times, alternative investments enabled by tech are fast becoming a growing trend in Nigeria. They fall outside the scope of more traditional investments such as bonds and stocks but are often used to supplement these traditional investments. They are mostly more complex and less frequently traded but allow investors  to diversify their portfolio, reduce the effects of market volatility (large swings in  asset prices) on their investments while achieving long term investment goals even in periods of high market uncertainty.

Common Characteristics of Alternative Investments

Though strategies may differ across these investments they often have the following general characteristics;

1. Minimum investment requirements are usually higher compared to traditional investments.
2. Applicable investment structures and risk/return profiles are often very complex.
3. They involve less liquid assets (not easily converted to cash) and thus have longer lock-up periods (during which investors cannot sell).
4. Potential returns are relatively higher.
5. Return correlation with bonds and stocks is relatively lowi.e. they don’t move in the same direction when market conditions change.
6. Relatively less regulations and hence lesser transparency can be expected.
7. Some legal and tax considerations may exist.

The Why and Why Not of Investing in Alternative Investments

Why? ​​​​​​​                                    

Offer diversification benefits.
Some protection from inflation (a decline of purchasing power of a given currency over time often accompanied by a rise in the general level of prices).
Potential for high returns.
Some tax and regulatory benefits may exist.

Why not?

Often relatively complex.
Illiquid and not very marketable.
Unregulated with high-risk.
Often long lock up periods.

What are some Alternative Investment Strategies?

Commodities, Real Estate , Private Equity, Venture Capital (which is similar to Private Equity but involves investing at the early stages of a company’s life that has growth potential), Hedge Funds and Structured Products such as Collaterized Debt Obligations (CDOs), Credit Default swaps (CDS), Structured Deposits/Notes etc.

Alternative investments platforms have been on the rise across Nigeria as Fintechs continue to disrupt the investment space. However, regulation, the absence of main stream acceptance and information asymmetry remain major challenges. As we look to the future, we can expect that as our capital and financial markets continue to develop and information asymmetry continues to thin out more Nigerians will take advantage of alternative investment instruments.