The pantheon of alternative investments might be relatively unknown, but it can be highly lucrative.
As investors look for returns beyond traditional investment options, they are also directing capital into projects and areas that radically vary, from antiques and collectible goods to shares in a Broadway musical.
While exploring these lesser-known asset classes, investors should consider some important rules: more due diligence is necessary than usual, thanks both to the variables involved as well as the lack of corresponding regulations and protections afforded to investors.
The investment objectives can vary significantly, as do the risks. It is very easy for the uninitiated and uneducated to lose their money, and quickly.
In addition to well-known stocks and bonds pitched by investment firms the world over, many of these same firms are now including alternative investments alongside their traditional offerings. Traditional investments no longer meet the demand for returns; it should come as no surprise that investors are now starting to venture into relatively unchartered waters. Following are six profitable but lesser-known alternative investments.
If an investor is looking to take part in a private enterprise, chances are they will invest their capital via a private venture fund or corporation. These entities are set up to provide capital for a wide variety of purposes.
Private loans have proven to be popular due to flexibility and risk management.
For example, private lenders will lend on risky short-term cash loans with high interest rates known as "Hard Money." More often than not an investor can either hold or flip a portfolio of these loans, which can be used from everything from much needed short-term capital to the refinancing of outstanding debt.
Venture capital would act as a somewhat distant relative compared to private lending. Whereas private lending is pretty straightforward with respect to terms and conditions, venture capital can be more complex.
By taking an equity position in the early years of a high-growth organization, a venture capital firm will provide capital at a crucial time when resources for these companies are limited.
Venture capital firms also provide geographic diversification for investors. Successful venture funds currently exist in Israel, Canada, Japan, China and the European Union which allow investors to access a broad range of international investment options to complement their local hard money portfolio.
Consider this scenario: While cleaning out the attic of a recently deceased family member, one stumbles across a Honus Wagner baseball card and a Babe Ruth rookie card, along with two separate collections of stamps from the Dutch Republic and the British East India Company of the 1700s. Make no mistake, this person is a multi-millionaire - simply thanks to two baseball cards and two books of stamps.
Absurd as this may sound, the market for antique stamps and cards is quite vibrant and lucrative.
For example, the Honus Wagner card in the attic collection would be only one of 57 known to currently exist and would fetch in excess of $2 million dollars.
The most expensive stamp in the world, the 1856 British Guiana One-Cent Black on Magenta, sold in June of this year for $9.5 million at auction.
Given the finite supply of these artifacts, the simple laws of supply and demand dictate the market. With only 57 Honus Wagners and a solitary One-Cent Black on Magenta in existence, these items can command big-ticket prices.
Signed memorabilia can also command higher amounts, especially for cards signed by players with storied careers.
Want the exposure to alternatives but also the diversification to go along with it?
Look no further than the liquid-alternative (LiquidAlt) fund. These vehicles not only invest in private companies, distressed debt, commodities, and the like, but further utilize strategies designed to hedge against risk in their portfolio; the goal is to reach an equilibrium of the the two that generates profit.
In some ways, these funds are similar to mutual funds, exchange-traded funds (ETF's) and other structured investment vehicles. The Investment Company Act of 1940 paved the way for these investment vehicles, allowing investors to access a broad mixture of alternative assets in a single investment. According to Morningstar, Liquid-Alt funds retained $279 billion dollars under management in 2013, a 300+ percent increase from 2008.
The 1979 Australian film "Mad Max" was not only notable for launching the film career of Mel Gibson, it was also notable for being produced for only $350,000 and returning over $100 million dollars at the box office, a record that stood until "The Blair Witch Project" was released in 1999 and returned over $240 million dollars on a budget of only $22,000.
Of course, these numbers were only possible not only because audiences saw a hit, it is also because the filmmakers were able to secure funding. Larger productions, such as "The Avengers" by Marvel Studios, cost in excess of $200 million to make and proved that financing is just as important to a movie with name recognition and star power as much as it is to one without.
It also shows that investors stand to reap huge profits if a potential hit is launched.
On the other hand, investors may stand to lose if the film does badly. Investors may also have to hedge against production delays, cost overruns and unforeseen events such as the sudden deaths of actors, leaving producers having to recast a major role or re-edit a film.
However, "Mad Max" and the "The Blair Witch Project" show that hit movies need not be made on astronomical budgets, and if it makes sense to an individual investor's objectives, it is not an opportunity to be ignored.
Investors might have heard of buying commodities such as gold, crude oil, copper or platinum. But there are lesser-known commodities as well -- frozen concentrated orange juice, hogs, palladium, tin, aluminum and even the carbon emissions all these produce - that offer significant appeal to both the alternative asset and the commodities market. Investors can purchase commodities in five main categories: Energy, Precious Metals, Industrial Metals Agriculture and Livestock (the disparity in pricing and production between Industrial and Precious metals is why they are considered separate.)
Commodities allow investors to hedge against pretty much anything they buy. Airlines, cruise liners, militaries and commercial vehicle fleets will purchase fuel contracts to hedge against future price fluctuations. Industrial metal producers (and soon, rare earth mineral producers) will produce assay reports in order to gauge future production schedules.
Everyday people can hedge against the fuel in their vehicles, electricity they use in their homes and businesses, and the food that they eat each day.
Lawsuits are expensive - sometimes astronomically so. Apple's lawsuit against Samsung, a dispute over a technology patent, was a windfall for litigators: Apple is estimated to have spent $60-70 million on legal costs.
This particular asset class, also known as plaintiff financing or lawsuit funding, allows investors to buy a stake in a lawsuit in return for a share of the settlement. Plaintiff financing companies provide access to all forms of litigation, from personal injury lawsuits and class actions to large commercial suits and international arbitration. Investors can finance plaintiffs, defendants, and law firms working on contingency - provided the case has merit. In short, if the lawsuit is a good one, then the investors will profit.
Legal funders provide access to all forms of litigation, from personal injury lawsuits and class actions to large commercial suits and international arbitration. Investors can finance plaintiffs, defendants, and law firms working on contingency - provided the case has merit. In short, if the lawsuit is a good one, then the investors will profit.
Legal financiers will structure transactions to produce positive results for their investors within a certain timeframe - often a fraction of the time that is typically seen in private equity and venture capital entities. The established players have impressive track records which speak to the industry's potential: In its first two years of existence, legal finance firm Burford Capital realized a 90% return on its short-term duration portfolio.
A recent high-profile case demonstrates investors' faith in litigation as an asset class. Former American International Group (AIG) CEO Maurice "Hank" Greenberg is currently pursuing a case against the US government, seeking more than $40 billion in damages for AIG shareholders. The lawsuit contends that the nature of the rescue - which included steep interest and gave the federal government an 80% percent stake in the company, a course of action it did not pursue with other bailed-out financial firms - violated the Fifth Amendment, which prohibits the taking of private property for "public use, without just compensation."
Mr. Greenberg set up a legal fund and turned to fellow financial executives to help foot the cost of this litigation.
Three main investors invested several million dollars into the legal fund, a strange twist that combines crowdsourcing, litigation finance and old-fashioned personal solicitation.
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