4 Best Ways to Invest S$1 million in Alternative Investments

Attaining a net worth of S$1 million qualifies you for the high-stakes world of alternative investments. Here’s the lowdown on this often-mysterious subject, and what to expect from four such popular products.

Alternative investments are usually reserved for those with a higher net worth. At a minimum, you’d need to have a net worth of at least S$1 million, an annual income of S$200,000 or more, or some equivalent combination of investable and liquid assets to even be invited into the room (figuratively speaking).

Hence, alternative investments may be somewhat of a mystery, no matter your income level or net worth. But in reality, alternative investments aren’t that different or exotic from the usual types of investments available to retail investors (aka people with average incomes and net worth).

The main difference is that alternative investments are usually more complex and sophisticated. They may also be less regulated. Hence such investments inherently carry a higher amount of risk, making them unsuitable for the average investor who may not have the knowledge or background to understand what they’re getting into.

This, in turn, prompts financial regulatory bodies to keep retail investors from dabbling in such risky investments, commonly by limiting them to accredited investors.

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You may wonder why the wealthy are willing to put up with the higher risk of alternative investments. For the chance to reap higher returns, of course.

Alternative investments can outperform their conventional counterparts, but they also come with higher fees. And as with any investment, high returns are by no means guaranteed.

With all that said, let’s take a closer look at four popular alternative investments.

Private equity

Private equity investment involves buying and managing companies for a short duration, before selling them for a profit. This is carried out by private equity firms using capital raised from institutional and accredited investors.

Unlike venture capital which works with startups, private equity tends to focus on mature or established companies seeking growth equity, or distressed businesses with critical funding needs. Private equity firms may also participate in buyouts or corporate takeover deals.

A private equity deal may involve significant changes to the business, such as severe cost-cutting measures (often leading to job loss) and other major restructuring. In some cases, acquired companies are forced to take on more debt to accelerate investor returns.

Controversial practices like these have caused private equity to be regarded as somewhat predatory. However, private equity firms do have a track record of successfully turning around failing companies.

A private equity fund is managed by a General Partner (GP) – often the firm that established the fund. It is customary for the GP to put up between 1% to 3% of the fund, representing shared interests with investors. All investment decisions are made by the GP, which charges around 2% of the fund assets as a management fee, and is entitled to up to 20% of profits.

The clients of the private equity firm that invest in the fund are known as Limited Partners (LP).

Related to this article: What Are Fixed Income Investments, And How They Fit Into Your Portfolio

Hedge funds

At their core, hedge funds are like any other investment fund – such as unit trusts, or mutual funds; they are a pool of money gathered from investors, and entrusted to a financial professional who invests on their behalf.

The key difference is that hedge funds employ trading and investing strategies that are generally considered too risky by traditional fund managers, with the goal of generating outsized returns.

Instead of seeking to outperform a market benchmark the way a mutual fund would, hedge funds take an “everything goes” approach, chasing returns in absolute terms.

Hence, a hedge fund may employ advanced trading methods such as short-selling, options, futures and derivatives. Furthermore, there is less regulatory oversight and transparency;  hedge funds are not required to disclose how they build their portfolio, for example.

Hedge funds are often a high risk-high reward type of alternative investments, and the

Industry is rife with spectacular successes and shocking failures alike.

Another potential drawback is the high fees charged, typically 2% of fund value, plus up to 20% of profits.

The WIld West world of hedge funds may contain a certain appeal, but It is important for investors to do their due diligence and adopt a cautious mindset when investing in hedge funds.

Related to this topic: What Are Mutual Funds, And How to Pick The Best Mutual Funds In Singapore 2023

Private equity real estate

Private equity real estate firms pool together investor monies to create an investment fund used to acquire and finance real estate properties. The investment objective is to utilise active management to foster strong price appreciation in time.

This is different from real estate investment funds (REITS), which are publicly traded shares representing real estate investments with revenues that come primarily from the rental income generated by the properties.

Private equity real estate requires high upfront capital starting from several hundreds of thousands, and is thus restricted to institutional investors or those with high net worth. It is also a highly illiquid type of investment, with years-long lockup periods. Investors also do not have the right to demand liquidations.

Despite these drawbacks, private real estate remains alluring for their high returns, where returns of 8% to 10% per annum are not uncommon in some markets. However, investors should be aware that they may lose their entire capital should the fund underperform.

Related to this topic: Best REITs In Singapore 2023 For Your Investment Portfolio

Structured products

Structured products are a type of investment whose performance is linked to that of an underlying asset, product or index. These may range from securities and commodities to stocks, bonds and currencies.

Commonly, structured products incorporate options, a financial derivative that gives investors the right to buy (or sell) at a predetermined price and by a predetermined date. In essence, you have to make the right call in order to make a gain – a task that can be further complicated depending on the complexity of the underlying assets or instruments.

In Singapore, there are two types of structured products offered – structured deposits and structured notes.

Structured deposits offer fixed or variable returns, depending on the structure of the underlying assets. Investors will receive their full principal if held to maturity, or if the issuer enacts an early redemption.

Meanwhile, structured notes offer fixed or variable returns. At maturity, there may be capital appreciation (and conversely, depreciation), depending on how the underlying assets perform.

Investors may also lose part or all of their capital should the underlying assets perform against them. Structured notes also often carry counterparty risk.

Due to their complexity, structured products are best reserved for highly advanced or experienced investors. In Singapore, structured products are offered to priority banking clients, and not to retail investors.

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