This is an interview with Arthur Salzer, the Chief Executive Officer and Chief Investment Officer of Northland Wealth regarding alternative investments, as these have become a “hot topic”. They have been long employed with positive results by leading endowment funds such as Yale and Harvard and pensions such as CPPIB, Ontario Teachers and OMERS as a way to better meet their obligations to their members.
Q: What are alternative assets?
A: These are investments that over time have included areas such as real estate, commodities, rare coins, stamps, artwork, and trading cards. Today alternative assets include private equity, private mortgage pools, real estate partnerships and hedge funds.
Q: How are alternatives different from traditional financial assets such as stocks and bonds?
A: In general, alternative asset classes are not priced on a public exchange (although some funds may hold publicly listed securities), and alternatives are typically considered less liquid, although this may not actually be the case as liquidity in many funds has improved considerably – some are even liquid on a daily basis.
Q: Are alternative investments more risky than traditional financial assets? A: It depends – while investing memories tend to be short, we have experienced the dramatic failures of large “blue chip” companies such as Lehman Brothers, Enron, Tyco, NORTEL and numerous Canadian junior mining and oil and gas companies. Business failures aside, many investors lose more money due to bad (i.e. emotional) decisions such as buying high and selling low. Alternative investments can mitigate this type of behaviour as valuations may change less rapidly than public securities, thus encouraging investors to let time and compounding work to their advantage.
Q: What type of research, or in industry terms “due diligence”, is required to invest in alternatives? A: Experience, education and a consistent approach to due diligence applies to both traditional and alternative investing. Risks such as leverage, organizational controls, auditors & legal advisors play an important part. Both require strong initial and ongoing due diligence. At Northland Wealth we regularly travel across North America and Europe to meet and review the leading institutional alternative managers to ensure we complete an in-depth review before we invest.
Q: Can alternatives investments improve performance?
A: The addition of asset classes which have a low, or better yet, negative correlation to a traditional stock and bond portfolio may reduce the volatility of the overall portfolio or, in other words, improve the consistency of returns which can be beneficial in aiding in total return over time.
Q: Are all alternatives investment managers similar?
A: There is an even greater disparity in performance between the top performers and the average when compared to traditional investment managers- there are the best, then there are the rest. Given the unique nature of the asset classes and trading strategies involved it is even more important to be in the top 2 deciles of managers in order to obtain the desired return given the risks. An investor needs to either be with the best of the class or maybe not invest in alternatives at all.
Northland Wealth is recognized in the industry as a unique and leading Canadian family office. We are often invited to participate and/or speak at ‘invite only’ leading industry events; in many cases we are the only Canadian attendee outside of the large Canadian institutional pensions. It is through the relationships forged at these events that we are able to access the leading institutional alternative managers in the world – Carlyle Group, AQR, Citadel, Marathon, Grosvenor, EnTrust , Avenue and Northleaf Capital to name a few.