Alternative investment choices

Alternative investments can take many forms.  However, the two major types of alternative investment strategies are:

1. private equity strategies – investing in companies at an early stage of development, usually when they are not listed on a stock exchange
2. absolute return strategies – investing with the aim of achieving absolute returns that are not related to traditional asset classes.

Private equity strategies

By buying into companies at an early stage of their development the potential for high returns is great. These companies often become either:

• listed on a stock exchange
• bought by another investor

and at this stage investors can receive the benefit of any growth in the value of the company over the investment period.

There are three main types of private equity:

1. venture capital – investing in companies with a product or concept where they need capital to finance operations or growth
2. mezzanine (sometimes called debt finance)  - investing in companies that are in a growth phase, but may not be able to access equity finance
3. leveraged buy-outs – buying a company using a larger than normal amount of debt.

Absolute return strategies

Absolute return strategies are a way of investing to achieve a pattern of returns that’s different to traditional asset classes – so they offer investors the potential for added diversification in their portfolios.

The goal of absolute return strategies is often to give investors:

• a better return outcome, given the risk, than traditional sharemarkets
• a degree of protection against negative returns by using hedging
• less volatility in returns.

Depending on the mix of strategies used, one, two or all three of these goals may be targeted at one time.

Hedge funds – the most popular type of absolute return product - usually aim to generate “absolute” returns, rather than aiming to outperform a specific benchmark. Unlike most managed funds, hedge funds can short sell investments to reduce market exposure – so the fund manager can:

• sell shares or other securities without owning them, with the expectation that the price will fall
• buy them back later at a lower price, making a profit. So you can see how hedge funds aim to boost returns even when prices are falling.

This is General Advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should consider the appropriateness of the advice having regard to your situation.

For information relating to our financial services you should refer to the Macquarie Equities Ltd Financial Services Guide.