Alternative investments can include virtually any investment that is not a traditional stock or bond, such as gold or currency to mutual funds that employ hedges, leveraged exchange traded funds, options, short-selling, derivatives and non-traded REITs ("Stern Advice-Investors pressed to go alternative," by Linda Stern, Reuters). "A majority of advisers -- 66 percent of a mix of commissioned brokers and fee-only advisers -- are inclined to employ alternative investment strategies, even for middle market clients," according to the article, citing a study released earlier this month by Natixis Global Asset Management. Financial advisers need to know that dangers lurk in the complex world of alternative investments and they must disclose these dangers to their clients.
Unfortunately, few sellers of alternatives have an in-depth understanding of these complex products and are thus unable to explain the risks to investors. Many alternative investments use derivatives and options to try to achieve their goals. It takes an expert to understand how they work. For instance, options are priced using a complex mathematical formula that won its creators a Nobel prize.
As a group, alternative investments lack a ready secondary market and therefore tend to be illiquid. Moreover, some of them (private equity, natural resource limited partnerships, and real estate) have lengthy lock-up periods during which sales are prohibited.
A major driving force behind the effort to sell alternative investments is the high fees associated with them. Hedge funds, for example, were dubbed by Warren Buffett as "manager compensation schemes." Alternatives also come with high expenses. Consequently, it takes an extraordinary return just to break even.
Some alternative investments like structured notes put all of the investor's principal at risk. Investors in so-called "100% principal protection" notes issued by Lehman Brothers lost almost all of their value after Lehman's bankruptcy. It turned out that the notes, which were sold by other firms, were really just the unsecured obligations of Lehman Brothers.
Investors should beware of the hype associated with alternative investments. They are too risky and complex for most investors.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
Unfortunately, few sellers of alternatives have an in-depth understanding of these complex products and are thus unable to explain the risks to investors. Many alternative investments use derivatives and options to try to achieve their goals. It takes an expert to understand how they work. For instance, options are priced using a complex mathematical formula that won its creators a Nobel prize.
As a group, alternative investments lack a ready secondary market and therefore tend to be illiquid. Moreover, some of them (private equity, natural resource limited partnerships, and real estate) have lengthy lock-up periods during which sales are prohibited.
A major driving force behind the effort to sell alternative investments is the high fees associated with them. Hedge funds, for example, were dubbed by Warren Buffett as "manager compensation schemes." Alternatives also come with high expenses. Consequently, it takes an extraordinary return just to break even.
Some alternative investments like structured notes put all of the investor's principal at risk. Investors in so-called "100% principal protection" notes issued by Lehman Brothers lost almost all of their value after Lehman's bankruptcy. It turned out that the notes, which were sold by other firms, were really just the unsecured obligations of Lehman Brothers.
Investors should beware of the hype associated with alternative investments. They are too risky and complex for most investors.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
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