Last Updated Monday, 06 December 2010
Traditional and Alternative Investments
a) The recent revelation of the Madoff scheme dwarfs the losses at Societe Generale, Sumitomo or Barings Bank. This ‘Ponzi’ scheme reported phony high returns, attracted investors and paid outflows from inflows of funds.
b) Lack of transparency and inadequate regulation are surprising and become a major issue in alternative investments. The black box approach in reporting profits and losses creates several questions. Moreover, several layers of fees for funds of funds and underlying hedge funds make high returns possible at the expense of increased risk from substantial leverage. Let’s only hope that we will not experience major similar incidents. c) It is inevitable that the traditional investment approach emphasizing transparency and low fees under a tight regulatory regime will come back into the limelight. Moreover, the traditional approach allows speed in entry and exit as well as flexibility to market exposure to reflect shifting investor needs.
d) Alternative investments emphasizing absolute returns
and hedging, as opposed to relative performance emphasized by the traditional approach, will continue to be popular vehicles. However, diversification and real due diligence are essential to avoid unpleasant surprises.