Investors are trying something different in South Africa

Investment in alternative assets can offer opportunities for substantial returns, says Dr Francois Stofberg, Senior Economist at Efficient Wealth.

These “alternative investments” blend innovation with risk and rewrite the rules of traditional investments, he said.

According to Stofberg, alternative assets have multifaceted origins, ranging from historical practices and economic shifts, to more modern alternative investments like crypto.

Historical alternative assets are rooted in ancient traditions and civilisations – like the Sumerians, Egyptians, and Greeks – and tangible assets, like real estate and commodities that have gained value over centuries owing to their stability, he said.

He added that art collections, rare items and fine wines have also become alternative investments in recent years.

Other alternative assets, like private equity, venture capital and hedge funds, have also grown in popularity due to their low correlation with traditional assets and their potential to provide higher returns for investors than conventional investments.

Cryptocurrencies can also not be ignored after entering the market in 2009, thanks to Bitcoin.

“Despite the vast number of instruments in this space, there is a golden thread that connects them all: These assets are mostly sought after for their diversification and growth beyond conventional markets,” Stofberg said.

Why the sudden popularity

Assets have come under increasing pressure over the last couple of years as markets have shown increased volatility, which has forced investors to seek diversification and risk mitigation through unconventional investments.

In addition, before 2022, low interest rates limited returns from conventional assets, forcing investors to look for alternatives with higher returns.

Advancements in technology and increased access have also democratised the alternative investment space, which has allowed more investors to participate.

Assets such as cryptocurrencies and private equity offer significantly higher returns and substantial gains, which is attracting institutional and retail investors looking to capitalise on emerging markets.

“Investors must, however, be cautious to not get carried away by all the promises of outsized returns and outsized fees as alternative assets present unique risks of their own,” he said.

“One of these is limited market liquidity, especially with art, collectables, private equity, and certain forms of real estate, which make these challenging to buy or sell quickly.

“Then there is regulatory uncertainty and technological vulnerabilities, which can impact assets like cryptocurrencies.”

He also added that private equity and venture capital could also experience a business failure, with several such companies on the JSE going under over the last few years.

With this in mind, he said that investors should use safer assets as the cornerstone of their portfolios.

For instance, equities have long outperformed other asset classes in generating long-term wealth while also outpacing inflation.

Boom

According to Jaltech’s Alternatives Investment Survey, 79% of investors plan to increase their allocation to alternatives to increase their portfolio’s diversification and the potential for higher returns.

The survey said that cryptocurrency (27%) is the most popular alternative investment for individual investors.

Private equity (12%) is the second most popular, slightly ahead of solar/renewable energy (11%) in third.

However, with the current energy crisis, Jaltech said that solar/renewable energy would be the most popular alternative investment segment, with over 23% expressing interest in the class.

Other findings from the survey include:

• 64% of individual investors invest in alternative investments.
• 65% of financial advisors offer alternative investments to their clients.
• 69% of investors allocate between 1-10% of their portfolio to alternative investments.
• Financial advisors generally favour structured products, hedge funds, emerging markets, and private equity.
• 38% of investors expect alternative investments to generate high returns.
• 93% of financial advisors don’t consider the return profile of alternative investments as a persuasive factor and instead see value in the diversification alternatives offer, along with their lack of correlation to traditional investments.
• Over 75% of both investors and financial advisors favour having exposure to both local and offshore alternative investments.

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