Alternative investing is as much a mindset, as it is about specific investments. Here are some alternative investments approaches culled from our members around the world that are applicable to any investment decisions.
Focus on absolute returns
The point of investing is to end up with more money than you started with. And that means you are looking for an absolute return: how much did you actually make, rather than "did you do better than some index or competing product".
Although it's good to review whether a particular manager has done better than the market or not, ultimately it doesn't matter; if the market goes down, even if you've lost less than the market... you've lost money.
Invest in markets or assets that your analysis leads you to believe will do well; don't invest in a product just because it's likely to (or, worse, has in the past) "outperform the market".
Understand that returns are one-dimensional, risk is multi-dimensional
Return is simple to calculate. How much did you have at the point where you exited the investment, compared with the moment you entered the investment. But alternative investment specialists are always much more focused on risk.
Risk, however, is multidimensional, and you need to have a clear idea what risks are applicable to your investment. There's volatility (the amount by which the price of an asset oscillates in the short term). There's drawdown risk (the amount by which an investment can fall from peak to trough). There's liquidity risk, both in the underlying market (how the price of an asset will change under liquidity stresses) and in the fund or investment structure itself (simply put, how easily can you get your money back). There's manager risk (that the manager makes a mistake, or doesn't perform as expected). There are any number of non-linear, operational, macro, and other risks that might affect your investment.
Make a list of what you feel the relevant risks are. Many will be risks about which you can do nothing, but understanding them will help you make better decisions about whether an investment is sensible or not. Importantly, if something unexpected happens while you are invested, if you've thought clearly about the risks in advance, you're more likely to make better decisions.
Know where the return is coming from
Once you make an investment, you can't control your return, but you can understand what will influence or drive the return. Your "world view" will lead you to investments, or combinations of investments, that reflect your world view. During the period that you hold the investment, you should monitor how this is developing or changing, more than the price or value of the investment.
This can be quite simple; for example "I think that more people will be interested in online advertising" so you buy Alphabet, or more sophisticated "I'm buying this building because I think the building next door will soon be renovated and make this one appear better value". You should constantly revisit your assumptions of the return drivers of the investment (much more so than its price performance), in case they change and you need to rethink your investment.
Obscure is good
When we're asked to define alternatives, we often end up saying "well, anything that's not traditional". Actually that's not quite such a lame definition; alternative investment practitioners know that the best opportunities are usually those that are yet well known or exploited, and hence the field of "alternative investment" is one populated by investment ideas that may not be immediately obvious. Did you invest in cryptocurrencies three or four years ago?
As an intelligent investor, you'll often be looking at opportunities that aren't obvious, or which are new to you. Of course that means that you need constantly to be learning, to be studying, and to be looking outside your comfort zone. But so long as (see above!) you understand what the return drivers are, and you've made a sound assessment of the risks... obscure is likely to do better than well-known. And if all your non-specialist friends are now talking about, say, bitcoin, then perhaps you should take care.
Diversification is the only free lunch - make sure you are diversified
Diversification is the only really effective risk mitigator. Holding a mix of assets that are each good investments, but which behave differently, will leave your portfolio's return intact, but lower its risk.
Holding both Apple and Alphabet isn't a diversification; they'll move with the U.S. stockmarket, with investor perceptions of tech-as-a-utility, and share similar risks in the event of, for example, a major cyber-attack, or a sharp fall in global stock markets. When an alternative investor says "diversify" what they really mean is that they're constructing a portfolio with very varied return drivers and risk parameters, not just different assets.
An alternative investor would, for example,prefer a mix of return drivers (some equity risk and some fixed income risk); a mix of liquidities (some real estate and some structured products); a mix of market risk and manager risk (some ETFs and some hedge funds), with the intention of creating a really robust portfolio with the best chance of consistently creating that absolute return.
Here's wishing you a successful and prosperous 2018!
(The author is a Director at CAIA Foundation)