If you're buying alternative investments, seek the lowest costs
If you're putting your money to work, it's important to make sure you know the costs
How many times have you heard someone speak of minimising costs in the investment process? It is sexier to discuss instead the wonderful returns from investing in residential property in Hong Kong and the United States, or gold, or a host of other areas. Yet efficient investing through tight cost management is one of the keys to success.
Although it is rarely discussed, low-cost investing is obviously important to investors, otherwise the Vanguard group, built on the back of low-cost index funds, would not be one of the largest asset managers in the world today. Now that index funds and exchange-traded funds have proliferated, especially in the past decade, it is time that investors turned their attention to the next target ripe for efficient investing: alternatives.
There is no established definition of alternative investments, but there are clues: they typically include anything that is potentially difficult to access or understand, anything that is relatively uncorrelated to traditional debt and equity markets, anything that is relatively illiquid, anything with high minimum investment amounts, or anything that is secretive and mysterious.
As you can imagine, there is no shortage of investment products in this category: think hedge funds, private equity, venture capital, timber, oil and gas, property, structured products, the list goes on.
Here are a few ways to get investors started on the path of low-cost investing in the alternatives arena:
Fees, costs and expenses are typically found in offering memorandums and detailed executive summaries, but they are often not well-explained in presentations or fact sheets. The fine print may contain a few surprises, such as the possibility your manager will claim performance fees before your initial investment is returned, or claim fees pegged to fund performance for a set time, regardless of when you entered the fund (in which case you might be paying performance fees even though your returns are negative). This may sound technical but, believe me, it can have a big impact on your income.