Alternative Investments

Alternative Investments

This topic is an interesting read. To be very frank I had not heard of alternative investments during my MBA curriculum.
So what do you think is an Alternative Investment?

It is very similar to the concept of alternative energy sources. The whole world is looking at alternatives to gasoline. People talk about wind energy, solar energy, tidal wave energy etc as alternative energy source.

So even in investment there are alternatives to traditional sources of investments.
Commoners like us look at equity and debt (Fixed Deposits/ Bonds) for investment purposes. But most of us unconsciously invest in assets other than the above. These investments typically yield great returns and have absolutely no correlation to equity or debt markets.

What are these alternative Investments?

1. For ages Indians have invested in property (real estate) for investment purposes. They see this as an amazing investment opportunity now given the property prices have more than trebled in the last 5 years.

This is the first of the to-be discussed alternative Investments – THE REAL ESTATE

2. You have often seen your father / mother investing in Gold/ Silver also as an investment vehicle. Given the Gold prices have shot up more than twice in 2 years produced even greater interest in these metals.

This the second of the alternative asset – THE COMMODITY

3. Often you find people in your family of the entrepreneurial enthusiast breed requesting you to help them with capital. You give them money after hearing their business proposal and pray that they give you back the borrowed money.

This is the third of the alternative asset class – THE VENTURE CAPITALIST

4. Given the rapid increase in land prices, commodity prices and revival in equity markets and debt markets you anticipate further increase. But since you have only limited cash available you borrow money from people and assure them an interest of 10% on it. You have leveraged your position. Now to prevent your investments from incurring a loss you undertake forward contracts with buyers and approach insurance firm which says they will insure your property (real estate), jewellery (Commodity) by paying them a premium.

You do all this with the intention to earn higher returns with the lowering the risk (forward/ insurance). This seemingly complicated but relatively easy exercise is termed as Hedging.

And the fund you invest would be termed as HEDGE FUND- which is the fourth kind of Alternative Investment

5. Now you find your uncle having an Auto garage which is financially troubled. He is planning to sell it off. You visit him to find if you could have some investment interest. You find that the garage occupies a large area in the prime location of the city though it is in a dilapidated condition.
Your own analysis concludes that your uncle is offering the garage at near dirt cheap rates. You offer to buy the garage from him to which your uncle readily agrees.

You open an authorized maruti dealership at the same site with some financial assistance provided by them. In a couple of years this venture becomes highly profitable. Your uncle is presently surprised on how you have managed to turnaround his garage business.

This is the fifth of the alternative investment option which is “DISTRESSED ASSET” investment

6. The last of the 6 alternative investment option is called “INACTIVELY TRADED SECURITIES”.

Let us suppose you believe in the story of Bio-diesel and “Jatropha”. You believe with increased Global warming alternative sources of energy with low emissions would be preferred. You realize the companies which invest in such production, though listed, are rarely traded on the stock markets as people lack visibility about the future of this field. Since you are very sure about the growth prospects of the company you take a large exposure in the security with the hope that the "INACTIVELY TRADED SECURITIES" would yield high returns in the future.