Here is Why MSMEs should Consider Alternative Investments for Diversification.
In the current dynamic market conditions, alternative investments can offer investors a way to diversify their portfolios from conventional investment options such as invoice discounting investment, equities, and cash funds. Although traditional investment options are the most common financial assets in the market, they aren’t the only investments available. Several alternative investments are available in the market, such as KredX’s Invoice Discounting, real estate, and art.
Most non-conventional alternative investments offer high returns because their performance doesn’t correlate with equities investment performance. However, it is worth noting that although there are several advantages of alternative investments, these high-return short-term investments are typically associated with higher risk.
Understanding Alternative Investments
Alternative investments are assets that are popular among high-net-worth and institutional investors. These investments may be complicated for a typical investor, but they are accessible and promise high returns. Examples of alternative investments include hedge funds, venture capital, and alternative investment funds and invoice discounting investment from KredX.
These investment options are nowadays mainstream and driven by investor urge to diversify their portfolios, solid risk-adjusted returns, and high investment earnings. It is important to note that alternative investments are attractive to investors during periods of uncertainty in stock markets. However, these high-return short-term investments, such as KredX’s invoice discounting investment, are usually not traded in public investment markets and are less liquid. Moreover, they are associated with enhanced leverage use or valuation challenges that may not be ideal for novice investors.
Advantages of Alternative Investments for MSMEs
Among the top advantages of alternative investments is increased portfolio diversification. Alternative investments offer investors a chance to boost their returns and diversify portfolios by offering exposure to uncorrelated assets. For instance, stock and equity investments have an inverse correlation to each other and are exposed to the same risk. On the other hand, Alternative Investments are not correlated and face different risks.
Potential for higher returns
Alternative investments have the potential to generate higher returns relative to conventional investing. In addition, these investment instruments can improve your investment portfolio’s risk-return profile and enhance total returns by offering access to a wide range of options and strategies.
Considering alternative investments have low to moderate performance relative to market indices, they can help investors reduce volatility within their portfolio of conventional investments. In traditional investments such as equities, the price tends to fluctuate based on factors mostly related to the company and not the asset. However, with alternatives, you avoid volatility associated with publicly traded instruments because an actual asset is backing your investment. For instance, with KredX’s invoice discounting investment, the unpaid invoices will act as an actual asset.
Low correlation with equities
The alternative investment market has a low correlation with the stock market, which highly fluctuates. Therefore, asset prices of alternatives tend to move inversely relative to public market trading prices. Considering alternative investments’ prices may increase as those of traditional markets drop, they become useful alternatives for portfolio diversification.
Hedging against inflation
Another advantage of alternative investments is their potential to hedge against inflation. Traditional assets such as equities can be inflationary protection in the long term, but with growing inflation, their prices can drop as concerns about the economy’s health grow. However, with alternative investments, investors are assured of solid inflation hedges despite the price increase.
In the past, alternative investments preserved high-net-worth individuals and institutional investors, but that has changed in recent years. Nowadays, retail investors can take advantage of alternative investments such as Exchange Traded Funds (ETFs) and mutual funds. Although the investments are publicly available, they might employ complex or non-traditional strategies.
Drawbacks of alternative investments
The main downside of alternative investments is their illiquidity relative to conventional assets. They need more investment timelines, so it may be time-consuming and challenging to liquidate your investment and get your cash. Chances are that your investment will be locked, and you can only access your funds after the investment matures. Additionally, the investment may mature after ten years, and only some options will offer returns.
Lack of transparency
Alternative investments are less transparent relative to traditional investments because the same regulations as most traditional assets do not govern them. The lack of regulation in the alternative investment market makes alternatives more opaque relative to public markets. As a result, it may take time to track the performance of your investment. Hedge funds, for instance, are not required to disclose their strategies or holdings, which may make it difficult to understand how your money is being invested.
Alternative investments can have larger fees than conventional assets, which is another drawback. For instance, investing in a mutual fund could incur a higher management cost. This is because these kinds of investments are frequently more complicated and need more effort from the manager.
In conclusion, alternative investments are great options for conventional investment assets These high-return short-term investments promise high returns, and since actual assets back them, they can be good alternatives to hedge against inflation. Additionally, they are beneficial in portfolio diversification since they are uncorrelated to equities that tend to be highly volatile. However, they have drawbacks like being illiquid, which means you cannot get your funds until the investment matures, and they are often associated with high fees and a lack of transparency compared to traditional assets.
If you are looking for alternative investments, then consider KredX’s invoice discounting investment services