Alternative Investment Project|
Cover Page| 1|
Content Page| 2|
Executive Summary| 3|
Content of Project| 4|
Assignments of work| 19|
The purpose of the report is to do an in-depth investigation, study and analysis on alternative investments. From the various alternative investments, our team of analyst chose commodities, variable annuities and hedge funds as our subject of interest for the study. Each financial product has its own aims as to cater to the different investment goals to meet the needs of investors. Thus, just by looking at the basis on expensiveness and tax-efficiency, and then from selecting the better one is unwise. We have to look at the overall picture and considering other indispensable factors like risks, liquidity, asset allocation which are equally important. Therefore, our basis of evaluation comprises of various important factors so as to make a robust analysis.
Firstly, commodities are a highly demanded investment which is traded using options and futures contract.. Moreover, they are also an element of diversification that investors can lower their vulnerability to market volatility. Despite its high volatility in its prices, it managed to gain a higher return as compared to stocks and bonds. As commodities have a low correlation with bonds and stocks, it is able to reduce unsystematic risk through diversification. Its high correlation with rate of inflation thus looks favorable in times of crisis and these enable investors to control its asset allocation decision. By using the 60/40 tax treatment, it has shown that it is indeed an efficient method in lowering taxes. Its high commodity market liquidity thus seem promising to investors as it correlates well with it market trading especially in corn, gold and precious metals futures. Moreover, it is advisable for them to allocate 5% to 10% of their investment to commodities so as for better diversification to eliminate unsystematic risk. As it has no or few substitute, it is advised that investor should take note of any unexpected risk involved.
Variable annuities on the other hand are tax-deferred with a withdrawal date only after the age of 59½. The performance of its sub-accounts affects many aspect of variable annuity. This is so as the performance of varied underlying investments in the sub-account results in non-uniform distribution in its returns. Furthermore, variable annuity is relatively volatile as it returns tend to varies as accordance to the returns of its underlying investments. Thus, granted with a choice of an asset for the underlying investments, investors will choose an underlying asset that is non-correlated to their portfolio holdings. Variable annuity also incurs reasonable costs. However, the main benefit of investing in variable annuity is that it is highly tax-efficient as it is a tax-deferred vehicle. This reduces the tax burden on investors and at the same time creates an opportunity for them to invest in tax-inefficient vehicles before the withdrawal date as no tax is imposed before the date. The downside to investing in variable annuity is that it has liquidity risks. However, it can reduce unsystematic risk significantly due to the investment options for its sub-account and this important aspect of it also provide investors with the ability to allocate their assets.
The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions which brings investors an indispensable option to invest in hedge fund. With a low standard deviation of almost zero, hedge funds are highly of an advantage as it does not fluctuate widely within periods. However, volatility is not the only indicator of risk affecting the fund....