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 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 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 in an emission reduction project in a developing country. A developing country has the advantage of lower cost of labor, lower power costs, and lower regulatory requirements. •The CDM provides a sustainable development to the host country as investments improve the overall machinery and technology. •CDM projects generate emission credits known as Certified Emission Reduction (CER) credits which is equivalent to one ton of Carbon Di Oxide (CO2) emission. •Examples of a CDM project can be investing in rural electrification using solar panels, investment in sustainable energy etc. Joint Implementation (JI) •Joint Implementation follows a similar mechanism with the exception, that the host country is not a developing nation but another Annex 1 country, a developed country. •The foreign player benefits form the investments in the form of tradable credits and the host country benefits from the foreign technology and investment transfer. •JI projects create tradable units called Emission Reduction Units (ERU). •It provides them a cost efficient mean to fulfil part of their Kyoto commitments. Trading Units in the Carbon Market

• Represents an allowance to emit one ton of CO2 for the absorption of GHGs Removal by a removal or a carbon sink activity. Unit/Kyoto Unit • Generated and issued by Annex 1 parties by means of afforestation, better technology etc.

Emission • Credits that are issued under the joint implementation(JI) mechanism that represents an allowance to emit one ton of CO2. reduction • Example: Proper treatment and production of biogas and landfill sites to unit (ERU) prevent methane from being absorbed in the atmosphere.

• Issued by the clean Development Mechanism(CDM), these credits represent

Certified an allowance to emit one ton of CO2 .It can be used by annex 1 countries( Emission developing countries) to meet their emission targets. Reduction (CER) • It is generated when Annex 1 countries invest in emission reduction projects, that contribute towards lower pollution levels. European climate exchange.

Exchanges European NASDAQ OMX Energy commodities trading in Exchange. Europe. Carbon Allowances. Commodity Exchange PowerNext. Bratislava. Advantages •Help in reducing global warming. •Generate extra income from trades in carbon credits. •Energy saving initiatives becomes more popular because of the awareness generated by carbon credits. •Helps to provide diversification as it has low correlation with traditional investments. •Helps to optimize returns from the portfolio. Disadvantages •Carbon Trading is aimed at the Wrong Objective •Used for the wrong purpose •Carbon Trading is Antidemocratic •Interferes with Positive Solutions 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 Currency

• Historically, trading currencies was reserved to multi-national corporations and well-financed investors, but now, this market has been opened up to all investor today who are willing to enter it. • The foreign exchange (forex) market is the place where one currency is exchanged for another. • The forex market offers trading for 24 hours a day, five days a week. It is the largest and most liquid market in the world. Base and Counter Currencies

• Currency quotes are expressed in pairs. • Counter/Home currency: First currency in the pair. • Base/Foreign currency: Second currency in the pair. • Example: Let the Indian rupee and U.S.Dollar exchange rate i.e. INR/USD be 65. This means that every 1 unit of USD is equivalent of 65 Indian rupees. Forex Quotes

• Forex quotes always include a bid and an ask price. • From the point of a dealer, bid is the price at which he/she is willing to buy the foreign currency in exchange for the base currency. • The ask price is the price at which the dealer is willing to sell foreign currency in exchange for the base currency. • The difference between the bid and the ask prices is referred to as the spread. Example •Indian Rupee and U.S. Dollar (INR/USD) has a bid and ask price quoted as 63.5/64. •Indian rupee is the home currency and U.S. Dollars is the foreign currency. •To purchase 1 USD, one requires 64 INR. •When the investor sells 1 USD, he/she gets 63.5 INR in exchange. Reasons to consider investing in Currency •Diversification •Level Playing Field •Global Economic Hedge •Capital Appreciation Participants in the Forex Market

Banks:Banks facilitate forex transactions for clients and conduct speculative trades from their own trading desks.

Investment Managers and Hedge Funds: Trade currencies for accounts such as endowments and pension funds which provide huge investments.

Corporations: Big manufacturers and producers of good and services import and export their produce to widen their customer base.

Individual Investors: Retail investors act as speculators mostly to gain advantage from the exchange rate differences between the currencies. Risks Traders Should consider •Leverage Risks: In forex trading, leverage requires a small initial investment, called a margin. Even small downward price fluctuations can result in margin calls, where the investor is required to pay an additional margin to bring it back to the same level it started. •Interest Rate Risks: If a country’s interest rates rise, its currency will strengthen because investors all around the world will make investments in that country’s assets, because a stronger currency provides higher returns and vice versa for a country with a low interest rate. Risks traders should consider •Transaction Risks: Forex trading occurs on a 24 hour basis resulting in exchange rates changing even before trades have settled. The greater the time difference between entering and settling a contract, higher the transaction risk as it allows exchange rates to fluctuate • Counterparty Risk: Counterparty refers to the risk of default from the counterparty which is either the dealer or broker in a particular transaction. Unlike futures, spot and forward contracts on currencies are not guaranteed by an exchange or clearing house, which acts as a guarantee for prevention of such risks. Risks traders should consider •Country Risk: One must assess the structure and stability of the issuing country as investing in a currency also means that an equal amount analysis of the respective country also needs to be done. A shortage in currency reserves can occur due to frequent balance of payment deficits and result in devaluation of the currency. Economic factors that affect the Forex Market Capital markets International trade A nation with goods or services that are in high Markets are critical to what is happening in the demand internationally will typically see an forex market, since both fixed income securities and appreciation of its currency. Countries with a large trade currencies rely heavily on interest rates. A change in deficit are net buyers/importers, which leads to yields will directly affect currency values currency depreciation. Factors Economic Releases Political Conditions Measures from increasing government spending to GDP ,Inflation, employment levels, retail sales, tightening restrictions on a particular sector or manufacturing indexes and capacity utilization carry industry, the fiscal and policies and an upcoming important information on the current and election are the factors that need to be accounted forecasted strength of an economy and its currency. for. Strategies used in Currency Investments •Fundamental analysis •Technical analysis •Range trading •Momentum trading •Carry trade 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 Art Funds •Art funds are funds which are collected by a pool of investors having an interest in art. The funds of this vehicle are used to generate returns, by acquisition and disposition of art. •Structured like hedge funds, these are dedicated to the very rich and high net worth investors. •Managed by a professional art management firm, they deliver returns through the appreciation and sale of art work, which includes paintings, photography, video, sculptures and print. History of Art Funds

•The first art investment fund was the British Rail Pension Fund (BRPF). •In 1974, the fund invested in over 2500 works of art in a period of 6 years. It delivered a compounded yearly return of 11.3% for the period 1974 to 1999. •After a great success, there were various Wall Street investors who were willing to invest in this asset class. But these investments never paid off due to poor management and high operational expenses. Examples of modern day Art Funds •Anthea – Contemporary Art Investment Fund •The Fine Art Fund Group •Artemundi Global Fund •Liquid Rarity Exchange •Saatchi Art Advantages •Provides diversification: Having low correlations with traditional financial markets, investors willing to optimize their portfolio with diversified assets, hedging against market downturns and inflation can consider investing in art funds •Art appreciates over time: Unlike stocks, art appreciates over time. It holds its value on the higher end, and if investments are made in the correct art works, there can be considerably high returns. •Enjoyment value: Art investors consider art as a passion more than an investment. It brings down aesthetic values and a sense of status symbol as it is perceived to be luxury product. Disadvantages

•Use of analytical tools: Traditional financial modelling tools are unable to predict the trends in the art market due to its unique nature •Advice from professionals: Unlike traditional market professionals who can suggest their top picks, advice for purchasing or selling art works is very difficult as past performance is not considered a reliable measure. •Not a liquid asset: Art works are not considered a liquid asset. Therefore investments in art funds can lead to returns that accrue in long periods of time. •Poor regulation: The art market is not well regulated. This leads to low levels of confidence among investors and high levels of price fixing and manipulation. Where to buy Art from?

Galleries Art fairs

Auctions Online Where to Buy Art from Investment Strategies •Geographic arbitrage: Aim to exploit differences in price realization for certain artists’ works in different geographic locations. •Artwork driven strategies: Seek to profit from issues impacting a specific artwork’s offered price (such as issues relating to its condition, provenance, title, etc.) •Regional art strategies: Concentrate on investing in art from a particular geographic region (i.e., Chinese art). •Intrinsic value strategies: It involves purchasing art that is perceived to be selling at deep discount. Investment Strategies •Period strategies: Focus on investing in a particular period of art (modern, contemporary, impressionist, etc.) •Emerging artist’s strategies: It focuses on the investment in artists that are not yet established and therefore have the potential for rapid price appreciation. Role of an Art Fund Manager •Identifying potential acquisitions. •Raising capital for the fund. •Managing investor relations. •Handling administrative compliance for the fund. •Showcasing the investment portfolio of the fund . 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 What is Cryptocurrency? •Built on advanced mathematical and computer engineering principles, cryptocurrency uses an extremely complex code known as cryptographic protocol that encrypts data transfers. •Generated through an algorithmic rate which has a specified limit, mining the currency is only possible to a certain limit. •Unlike fiat money that can be held physically, these are present in digital form and therefore have a digital value. It can serve as a digital equivalent of cash, used to pay for many services. Evolution •The term cryptocurrency, first came into being when it was discovered by an American cryptographer named David Chaum. The first form of internet cash was introduced in Netherlands, by the name DigiCash. •The second wave was augmented by a spree of start-ups that created various payment solutions and virtual money systems. •Today there are more than 850 all over the world.

Bitcoin Ripple

Crypto- currency examples

Coinye

Dogecoin How Does It Work? •A cryptocurrency works on a block chain concept. It is a master that stores all previously carried out transactions and activities. As the transactions are recorded right from the start till date, a block chain has a finite length. It is duplicated several times across a network of computers and the updated copy is sent to all cryptocurrency holders. •By the use of powerful computers, miners update and authenticate all information, ensuring proper and safe processing of data. Miners help to create wealth in the form of brand new cryptocurrency units. •The prevention of double spending, which can arise during the lag time between a transaction’s initiation and finalization, ensures that the currency units are not duplicated and sent to multiple recipients. How does it work? •With no intermediaries involved in the process, transaction fees are eliminated to a great extent. •Each and every transaction is made public in the block chain network, but the identity of buyers and sellers are not revealed. •Every cryptocurrency has a private key that allows them to exchange units. This is in the form of a whole number between 1 and 78 digits. Without this, the currency cannot be obtained and converted for use. Although being a safety measure, if lost, all holdings under the key are also lost.

Investing Strategies

Dollar cost averaging Balanced Portfolio Involves buying fixed amount of The total investment is divided into equal cryptocurrency at regular intervals. No proportions among the various specific allocation is done. Investments alternatives to invest in. are made according to investor’s preferences. Investing strategies

Unbalanced Portfolio Profit Reinvesting Investment allocation depends upon the Once profits are realised, they can be expected performance of the currencies. ploughed back as investments in other Does not necessarily involve equal currencies to generate better returns. distribution of investments. Advantages of Cryptocurrency

•Built-in Scarcity may Support Value •Loosening of Government Currency Monopolies •Self-Interested, Self-Policing Communities •Robust Privacy Protections •Harder for Governments to extract financial data •Generally Cheaper Than Traditional Electronic Transactions Cons of Cryptocurrency •Lack of Regulation Facilitates Black Market Activity •Potential for Tax Evasion in Some Jurisdictions •Potential for Financial Loss Due to Data Loss •Potential for High Price Volatility and Manipulation •Often Can’t Be Exchanged for Fiat Currency •Irreversible and Limited to No Facility for Chargebacks or Refunds Exchanges Involved

Coinbase Shapeshift Poloniex Bitsquare Cold Storage Options •PC Wallet: This involves storing coins in your computer’s hard drive. This might seem to be very secure, but in case of a virus attack or a drive crash, all of the data could be deleted and retrieval can become an issue. •Hardware Wallets: Resembling a memory stick, it consists of a software, that provides for storage of cryptocurrencies. Example: Ledger wallet •Paper wallets: Being offline, created by software and printed on paper, they are used to obtain and use the . •Brain wallets: Brain wallets include memorizing the keys that are used to retrieve cryptocurrencies. It gives one, access to . It consists of a long list of short and random words. “Know what you own, and know why you own it.“

- Peter Lynch THANK YOU