Investor, how familiar are you with alternative investments?

What exactly are alternative investments? How does one invest in them? Mandatum Life’s Director of Alternatives, Jussi Tanninen, provides answers to these questions.

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What are alternative investments?

“For us, alternative investments mean very traditional investments, for example, in real estate and unlisted companies, as well as, for example, money lending through bilateral agreements, i.e. by means other than bonds. Alternative investments are illiquid, meaning they cannot always be quickly sold and converted into cash.”

Why should every investor know about alternative investments?

“It is good to know about alternative investments because they are a very sound investment object for many investors’ portfolios.

In very low-risk investing, it is generally wise to invest in liquid assets, which allow money to be easily withdrawn. However, if the investor can afford to be flexible with liquidity and if unexpected liquidity needs have also been taken into account, it often makes sense to invest part of the assets in illiquid, i.e. alternative, investments. Due to their weak liquidity, their return expectation is often very appealing in relation to the risk of losing capital.

However, investing exclusively in illiquid assets is not a good idea for anyone. The majority of investors, if they fall on difficult times, might need the money that is tied up in their investments. Cash cannot be withdrawn from alternative investments as quickly, and the redemption conditions may be unfavourable.”

Why should one consider investing in alternatives?

“The biggest advantage is the liquidity premium. The liquidity premium means the investor receives compensation for the investment not being automatically convertible into cash at the investor’s preferred date. The investor can thus take advantage of liquidity premiums in order to achieve a higher expected return while being exposed to the same risk of losing capital.

While the existence of a liquidity premium is subject to debate, a wealth of academic research has been conducted on the topic. However, I believe it is a matter of common sense. If there are two investees with the same return and risk, naturally the more liquid investment is the one to go with. For the illiquid investment to be selected, it should have a better return expectation.”

How can I invest in alternatives?

“When considering alternative investments, the choice of partner is very important. For private investors, the range of investments in alternatives is often rather narrow, and inexperienced investors may have difficulties forming a picture of all the risks related to the investments. With an experienced major investor such as Mandatum Life, private investors have access to investment objects that are otherwise only available to large investors.

In addition, we continuously think about how alternatives, such as real estate investments or private debt investments, relate to other asset classes, like equities and bonds.”