Investoid

I received this question from Jason, regarding high return alternative investments:

“I’m looking to distribute 50K in to some form of investment. My advisor wants to invest into my existing mutual funds, which has roughly 45K. Last year my ROI (mutual funds) were around 9% not to exciting, but it’s a gain.

I would like to make this invest more aggressive than my mutual funds. What option do I have of making a return of 15-20% other than stocks, buying via my financial advisor.”

Note: Jason lives in the United States.

Before I answered this question I needed to understand Jason’s mentality and desire for such a high return. It turns out that Jason views this money not as retirement money but rather as risk capital. He wants to have a solid financial education and is willing to lose a pretty substantial amount of money in the process (but is obviously not intending to do so). While this is a pretty large proportion of his net worth to be using as risk capital, it is his choice to do so and he is well aware of the risks that go along with trying to achieve such high returns.

That said, what can Jason get into? Here are a few of the options I found. Note that most of these involve actually buying stocks, but these stocks are vehicles for other investments.

• Hedge Funds: there are a couple of US-listed hedge funds on the markets, including Fortress Investment Group. Hedge funds have been extremely popular since the bear market in 2001, but their recent returns have been less than stellar compared to the equities market as a whole. Jason may also qualify to invest in a ‘fund of funds’ - a portfolio of hedge funds managed by a third party.
• Private Equity: this asset class has made a huge comeback in the past couple of years. These firms typically buy public companies using large amounts of debt, turn around their operations and/or break up the company, and then usually spinoff the asset(s) back onto the public markets a few years later. There are a couple of private equity firms who are public; the most notable new entrant in a few weeks will be Blackstone. If you want a sector-wide exposure to this area, check out the PowerShares ETF
• Sector speculation: you could choose a sector that looks hot right now (or in the near future), and buy the corresponding ETF. Some examples include a materials or metals ETF, uranium stocks, or energy ETFs.
• Personal lending: if you’re willing to place your money outside your broker, you could go on Prosper and lend to C/D quality borrowers. Returns for this group are around 14-18%, although you must factor in some level of defaults. Prosper uses a fixed 3 year term for its loans, so you must be ready to have your capital tied up for awhile. There is also a lot more work with this option on your part.
• Double return ETFs: there are ETFs out there that attempt to mirror the daily return of an index and double it, each and every day. This means that the ETF is pretty volatile, since your holding period returns (up and down) are compounded daily (ie. just because the market’s up 2% after two days doesn’t mean you’re up 4% - it depends on how much it was up/down each day). Nonetheless these ETFs allow you to speculate on short term runs on indices. I am only familiar with the BetaPro ETFs in Canada, but am sure there are similar ones in the States.

As the number of investors (and their level of knowledge) out there has increased, so too have the options available to the masses. You can structure a fairly aggressive portfolio with low costs today thanks to all the options available to you. Beware of the risks associated with this, and make sure that you understand what chances you’re taking when you’re chasing high returns.

If you have a question you’d like me to tackle, simply contact me.