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CHAPTER 8 Liquid Alternatives Other Alternate Investment Asset Classes CHAPTER 8 Liquid alternatives Investment in Wine Funds Film investment as an attractive opportunity Origins and growth of carbon markets Investment in currency Investments in art funds Concept of cryptocurrency Liquid Alternatives •Due to the global financial crisis of 2008, investors could not sell assets across their portfolios fast enough. The S&P 500 TR index fell about 57%. •Investors found their investments blocked down in private real estate and private equity commitments which made them realize the importance of liquidity. Post crisis, investors began to demand better access to their capital and improved portfolio transparency. •Liquid alternatives consists of mutual funds and exchange-traded funds (ETFs) that aim to provide investors with diversification and better liquidity. Liquid Alternatives vs. Traditional Alternatives Low Daily liquidity High investment transparency minimums Reduced fee Efficient tax structure reporting Liquid Alternative Strategies •Long-Short Equity: Long position is taken on stocks that are expected to appreciate and a short position for stocks that are expected to decline. This helps in minimizing the market exposure. •Managed Futures: Implemented by managing futures strategically, by exploiting the price trends in the global financial market. It provides a non-correlated hedge against downfall in traditional markets. •Merger Arbitrage: Earn returns by exploiting mispricing opportunities created due to merger and acquisition transactions. The stock of the target company is purchased, while stock of the acquiring company is short. •Market-neutral: Seeks to profit from both increasing and decreasing prices by taking long and short position in different stocks. Liquid Alternatives-Criticisms Appropriate manager quality Limitations of trading strategies High costs are involved Technological & Operational Changes required to be Implemented •Client Service •Establishment of Retail-specific processes •Real-time portfolio information •Streamlining and outsourcing Liquid alternatives Investment in Wine Funds Film investment as an attractive opportunity Origins and growth of carbon markets Investment in currency Investments in art funds Concept of cryptocurrency Investment In Wine Funds •While traditional investment markets have been static, investors in fine wine have seen a splurge of growth. This mode of investment has been seen with low risk levels and stable returns. •Mere 1% of wine produced globally falls under the investment grade category. •An investment grade wine is a wine that has a high chance of value appreciation from medium to long term, usually 5 years. •The emerging markets across Asia and growth of BRIC economies has led to an impact on this asset class. Factors Boosting Investment- Grade Wine Valuations •Increasing Demand in the Developing World •Diversified Portfolios •Robust Secondary Market Creating A Platform For Buyers & Sellers Online wine exchanges In- person Speciality auctions stores Online Avenues Vineyards auctions Why Should You Invest? •Safe Haven •Past performance •Tangible asset that improves with age •Positive outlook •Change in perception •Reliable returns Factors Affecting Wine Prices •Supply & Demand: Low demand can create low prices while low supply can lead to exorbitant and sky rocketing prices, especially in case of high reputable brands. •Vintage: The better the wine, more is the price. Vintage wines carry high reputation and charm in the buyer’s mind. Acting as a Veblen good, wine exhibits a status symbol. •Economy: A conducive economy, high disposable income, better perception about wine and less regulations in the economy can magnify the effect. •Age & Maturation: Old wine is expensive wine. More the age, the better the wine tastes. Risks Associated •Past Performance is no Guarantee for Future Results •Unregulated Market •Fraudulent Companies and Boiler Room Scams •Quality of Wine is not static •Temptation of Fine Wine Consumption •Fake Bottles Liquid alternatives Investment in Wine Funds Film investment as an attractive opportunity Origins and growth of carbon markets Investment in currency Investments in art funds Concept of cryptocurrency Film Investment • For many investors, investing in films are one of the best investments, because the benefits stretch far beyond the sales of box office tickets. • Television airings, DVD/blue ray sales, sale of merchandise and subscriptions are all accounted for towards the profits a film makes and can continue to be profitable for a lifetime. • Films do have a potential for a very high return as compared to traditional investments. Risks Associated with Investing in Film Funds Creative risk: The quality of the script and the track record of the actors and the directors are crucial for creating a better image in the minds of the audience. Production risk: The setup involving the location, the weather, clearance issue, costs and audience acceptance in case of any resemblance or misrepresentation of facts and untimely death of a crucial member can halt the process. Performance risk: Having an A-list cast, producer and/or director is no guarantee of success. Meaningful presentation of the idea, theatre, sale of DVD’s, TV rights, subscriptions and promotions are crucial components. Different modes of Film financing •Equity •Pre-Sales agreements •Gap financing •Tax incentives •Deferred & crowd funding Investor Attraction Agencies Strength of Team & Experience Maintain databases of entities that have a Director, producer, cast and crew should sound backing and of high reputation. preferably have a good track record. Have a knowledge of the taste and Famous personalities help to create better preferences of the investors seeking to put image and perception. in their money. Avenues Plan of execution. Guarantor bonds Should be clear, understandable, reliable Seen as an assurance to investors about and marketable to become a viable the timely and appropriate execution of proposition for investors. the undertaken project. Techniques to Research and Locate Film Investors •State film commissioners •IMDB •Entertainment Lawyers •Start-up investors •Philanthropists •Restaurant, bars, clubs Technology’s Contribution •Presence of online streaming applications, streaming rights to various channels, TV subscriptions etc. help to alleviate the subscriber base. •High end software, computer applications and intellectual property rights ensure prevention of piracy and duplication. •Production and distribution has become easily accessible and inexpensive, which has further led way to a creation of numerous production houses, thereby increasing competition. •Effective promotions on social media including Facebook, Twitter, Instagram, LinkedIn etc., play a very big role to create awareness and psychological demand for the product. Liquid alternatives Investment in Wine Funds Film investment as an attractive opportunity Origins and growth of carbon markets Investment in currency Investments in art funds Concept of cryptocurrency Carbon Markets • The global carbon market is one of the fastest growing market. • In the hour of rising levels of GHG’s, there is a dire need to create a global attempt to create a trade in the emission from any nation’s industry, car, aviation, power plants, factories etc. • Carbon market provides a financial incentive to reduce pollution levels and maintain efficient standards under an economic concept of Cap and Trade. What Is A Carbon Credit? • A carbon credit represents a certificate or a permit to emit one ton of carbon dioxide or the same of any other greenhouse gas. • Under the Cap and Trade system, every company is allocated a certain level of emission allowances which can be used to comply with the permissible emission limit. • They provide an incentive to companies to be within their permissible limit so that they can trade on these instruments and make extra profits. • This can be sold, traded, used up, etc. like any other commodity. What Is A Carbon Offset? • A carbon offset contributes to a real reduction in emissions by establishment of projects with clear boundaries, documentations and a concrete plan. • They are in addition to what is mandated and are outside the regulatory environment. • Carbon offsets usually generates a Carbon Credit which is then traded. • Projects like building wind farm, preserving forests, using non- renewable energy etc. form the part. How Does It Work? Companies that Credits or pollute within the Government sets allowances are allowance can sell a cap on the credited. the excess credits company as to Every credit to other the permissible represents a ton companies that limits. of carbon dioxide are struggling to emission. stay within the allowed limits. The Kyoto Protocol • An international treaty linked to the United Nations Framework Convention on Climate Change (UNFCCC), which established the cap-and-trade system that imposes national caps on the greenhouse gas emissions of developed countries. • Under this, the countries are divided into 2 groups, Annex 1 countries include developed countries, while the Non-Annex 1countries includes the developing countries. • Non-Annex 1 nations can earn carbon credits by investing in projects that lower emissions in their own countries by which they earn carbon credits. These credits are thus tradable to Annex 1 countries which have higher levels of pollution. Clean Development Mechanism(CDM) •Under the Clean Development Mechanism, any country under the emission reduction commitment can invest
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