By: Harris Warbington
By definition this is generally understood to be investments in something other than stocks, and bonds. After the tech bubble bust of 2000, many investors lost faith in Wall Street, especially its analysts. This was further exacerbated after the recent crash of 2007-2008, whatever confidence remained was smashed when Wall Street failed to warn clients of an impending disaster.
Some very large endowments and state pension funds took different courses of action with regard to their investment policies and sought to add alternative or non-traditional vehicles to their investment portfolios. One of the most prominent of the endowments funds pursuing this action was Yale University. Their investment policy called for no more than 12% in US equities, and 15% in foreign equities, with as much as 5% in cash. So where did the remaining 68% of their portfolios go? The balance was in private equities and hard assets such as real estate, oil and gas, etc. The average return for the decade ending 2007 was 17.8%. The results for the year 2007 was 28%. The results in the extremely depressed 2008 was a positive 4.5%. In 2009, the final results are not available, but the Yale Endowment went down in the first quarter, and it is believed it has more than recovered that loss since March 31, 2009.
By comparison, if Yale had invested their funds in the S&P 500 Index and not actively managed it with alternative vehicles their Fund would be down approximately 15% over the decade. Instead during the same time frame the endowment fund has tripled.
The point is that alternative investments available to you as well as to the Yale Endowment Fund should be explored as a meaningful part of your investment portfolio, especially 401K rollovers.
These can range from oil and gas royalties to income producing real estate hedge funds, to managed commodity accounts. This type of diversification can bring less volatility and more predictable returns to your investments.
As an example, some natural gas and oil investments today are yielding 8%-13% with no drilling risk.
I would urge you to reconsider your investment policy if it does not include alternative non-traditional investment vehicles. I would be available to show you the risks and rewards of several such investments.
Printed in the November 19, 2009 edition.