Real Estate

We all know what real estate is! It’s a house, an apartment building, an undeveloped acre of land.

Real estate investing is purchasing property to generate income rather than using a property as a place of residence.

There are several types of real estate investments, but most fall into two categories: Direct Investments where you physically own the property or Indirect Investments such as REITs, where physical ownership of the property is not required.

Direct Ownership (Direct Investment)

You can achieve this by investing directly into a property to earn rental income. The tangible and familiar nature of direct real estate investing has made it a popular choice amongst investors over the years, with the leveraged aspect of real estate investing driving superior returns.

Unlike investing in stocks, you can use significant amounts of financing when investing in real estate without adding a ton of risk, with the majority of the investment financed by the underlying mortgage.

Traditional physical ownership of real estate can offer a high return and substantial income stream, but it also requires more money upfront, active management, and high ongoing costs.

REITs (Indirect Investment)

Late-night calls to fix leaky toilets aren’t for everyone. For those less enamoured by the prospect of actively managing tenants, investing in real estate investment trusts, or REITs offers a more passive approach.

A REIT is a trust company that buys, develops, manages, and sells real estate. You can invest in shares of these companies on a stock exchange. By investing in REITs, you are investing in the real estate these companies own. This approach represents a more passive and less capital-intensive approach to real estate investing vs. direct property investments.

REITs are required to return at least 90% of their taxable income to shareholders every year. This means investors can receive attractive dividends in addition to diversifying their portfolios with real estate. Listed REITs also offer greater liquidity as their shares are traded on a stock exchange.

Hedge Funds

With over $3.6 trillion invested in the hedge fund industry, hedge funds are notoriously big business. Synonymous with lavish Wall Street antics for several decades, hedge funds have long been the most misunderstood asset class in finance. The name is typically the source of most confusion here.

While some hedge funds implement sophisticated strategies to help hedge the market, most of these so-called “hedge funds” are not based around a specific hedging strategy.

Hedge funds are pooled funds, aiming to make money irrespective of the prevailing market conditions by pursuing investments that are outside the traditional long-only portfolios of equities and fixed income.

Benefits

Flexibility

Unlike mutual funds, the unconstrained investment approach offers hedge funds managers the opportunity to generate positive returns in both rising and falling financial markets.

Diversification

As mentioned previously, diversification is a crucial aspect of portfolio construction. Hedge funds can produce a return stream with a low correlation to traditional assets, thus lowering the portfolio’s exposure to general market movements.

Return Potential

There are not as many regulations on hedge funds when compared to other investment opportunities, such as mutual funds; this provides hedge fund managers with more investment options. As a result, hedge funds have the freedom to implement more aggressive investment options across a broad spectrum of products to capitalize on opportunities as they arise.

Drawbacks

Higher Fees

Higher fees are the most often cited downside to hedge funds. Most hedge funds have a “2 and 20” fee structure. In this structure, investors pay a 2% management fee for operations of the fund and a 20% performance fee for any profit above a pre-agreed hurdle rate.

Less Liquidity

Hedge funds sometimes invest in illiquid assets. To account for this, they often have lock-up periods or longer redemption notice periods relative to more traditional public securities.

Less Transparency

Most hedge funds are not subject to the same disclosure requirements that apply to mutual funds as they do not advertise publicly. This lack of transparency can make it more difficult for investors to see exactly how their money is being invested.

The Future For Hedge Funds

A decade of central bank support has resulted in record-low interest rates and the longest bull market in history. This low volatility, utopian environment has favoured cheap index-tracking funds and made life difficult for those pursuing more complex, expensive strategies.

For years, hedge fund managers have longed for an uptick in market volatility, promising outperformance and downside protection once markets eventually falter. With volatility and uncertainty now at the forefront of the investment landscape once more, is a comeback on the cards for hedge funds?

Hedge funds have lost ground to passive balanced investments over the past decade

Generally, hedge funds are run by some of the best and brightest investment managers in the business. While the fees can often seem high, the recent market volatility may well coincide with the re-emergence of higher returns for the best performing hedge fund managers.

Interest certainly seems to be picking up. Forty-four percent of hedge fund investors surveyed by Preqin in June 2020 said they intended to increase their commitments to hedge funds over the next year, nearly double the proportion from a year ago.

No doubt, this increase in market interest is reassuring, and several hedge funds have seen performance soar due to the pandemic-induced volatility. However, other strategies have suffered the opposite fate. The challenge for all investors is, and always has been, separating the hedge fund managers that excel over time from those that don’t.

Commodities

Commodities are raw materials that are either consumed or used to build other products. As you can probably imagine, there is an endless list of these resources, but all commodities exist within the three categories mentioned below.

Agriculture

Commonly traded agricultural products such as wheat and coffee as well as livestock.

Metals

Metals are divided into traded metals such as copper and steel and precious metals such as gold and silver.

Energy

This includes commodities such as crude oil and natural gas. The oil market alone is larger than all metal markets combined with crude oil being the most traded commodity in the world.

How To Invest In Commodities

The commodities market has grown significantly since the day’s farmers and miners traded products in the local marketplace. In today’s innovative markets, commodities are either acquired directly, using commodity futures contracts or through investments into commodity ETFs.

Direct Investments

While there is nothing theoretically stopping you from directly purchasing barrels of oil or bushels of corn, the impracticality of actual delivery and inevitable storage issues has ensured that this logistical nightmare is seldom the investment method of choice for private investors.

Commodity Futures Contracts

Commodity traders typically use a brokerage to buy futures contracts. These commodity futures are obligations to buy or sell commodities at a future date, at a price agreed today. Commodity prices can be extremely volatile due to their sensitivity to regional, economic and operational risks. As a result, futures contracts are agreed between buyers and sellers to hedge this volatility risk. Generally speaking, when someone is investing in commodity futures, they’ll never physically take possession of the commodity; it is simply used as a speculative or hedging mechanism.

For example, a producer such as a farmer can sell futures contracts to lock in a selling price for their crop. Conversely, a consumer can buy futures contracts to lock in a purchase price for that crop.

Purchasing An ETF

The cheapest and easiest way to invest in commodities for most private investors is to find an ETF that invests in one, some, or even the entire commodities market, or ETFs investing in companies dependent on specific commodities.

Why Invest In Commodities?

While the volatility of commodities markets may present opportunities, this short-term trading approach is best left to the professional commodity traders given the speculative nature of the investments.

Despite this volatility, the low correlation to the broader market provides diversification benefits. Commodities can also act as an effective inflation hedge. Commodities sit at the epicentre of the global supply chain, ensuring that commodity prices should also increase as inflation rises.

Some precious metals function as a store-of-value play with investors turning to the likes of gold when there is fear in the market, with gold demand spiking as equity markets turn negative.

In summary, commodity investing is cyclical and distinct, with huge disparity between the performance of different commodities depending on the commodity in question and the time frame selected.

Although Gold offers a tried and tested currency hedging play and the return opportunities on offer across some of the more volatile commodities are undeniable, We advise investors to proceed with caution.

If you do decide to take an exposure to a specific commodity, be mindful of the risks involved. Without a detailed understanding of the commodity in question, future price volatility may become all too much to bear.

Those who are not well versed in any particular commodity may be best served investing in a broad-based commodity fund.