People are now looking at alternative investments, and not just stocks, gold and real estate. In an interview with Mint, Nelson Lacey, director of examinations, CAIA Association, an institution which provides alternative investment education, talks about what is alternative investment and what’s in it for Indian investors.
What do alternative investments mean? How do they differ from traditional investment avenues?
We sometimes say we can define alternative investment not by inclusion but by exclusion. So how it works is that alternative investments are not stock, bond or cash. Anything else will be considered as alternative investments. For instance, real estate fits into that category.
It’s a bonafide investment area that attracts professionals to study and understand. It includes private equity, venture capital, real assets which goes beyond real estate, like which invest in land, intellectual property, which is a big area, hedge fund trading strategy like equity long-short strategy, and any structured product investments. So these are the areas that are growing.
In India, financial literacy is very low, even in case of many wealthy individuals or families. Do you think people will be able to build confidence or understand alternative investments or consider putting money in such an option?
You see there are 1.3 billion people in India. So what people are we talking about? We are talking about people who are average, middle or lower, Indian or American whatever, I say no, it’s not geared for those folks. We are talking about people who are accumulating wealth and are thinking about building a proper investment portfolio.
Here we should ask a question, what percentage of Indian families is growing and accumulating wealth and looking for ways to invest? It’s very low, it may not be even 1%.
The next question: where do you see that percentage in the next five years? So that is increasing and, therefore, I see scope for alternative investment.
Let’s get explicit here. If I run a mutual fund in India and I want to get ordinary middle class Indians’ interest, I think I can sit down with people and I can make a case for investing say in Indian index fund and people will understand that I will buy at low and sell at high and that is the way I will make money. That’s the traditional way of investment.
So I would change it a little bit, here is the new initiative: you should buy the funds where none will take advantage when these funds go up but will do when these go down. Right away, when I say that, I think most people will say what are you talking about and how is that possible? So just crack open the door to the middle class investor and say you should be in long-short funds, so that when these stocks go down, you gain and when these stocks go up, you also gain, and people will start looking at you and ask how is that possible.
So I think there is an education gap; I think you get a filler and people will need to understand these markets.
Leave apart financial literacy, there are other problems when it comes to alternative investments in India like lack of information and transparency. It’s difficult to distinguish, compare or choose between the available alternative funds? Do you think this is a disadvantage for alternative funds or investors?
Let me try to answer that. First of all, I think this is Securities and Exchange Board of India’s (Sebi) job; I mean Sebi is tasked to make sure that these funds are bonafide and they are transparent.
Investors need to have information that is their right. I believe in free and open markets, for me the more information and choices the people have, the better it is. So for example, if the Chinese government says people are not allowed to short stocks, I think it is a horrible thing because that doesn’t make markets more open and transparent, instead it makes it less so. I think so far Sebi has done a great job and as time goes forward, it will only improve.
There are many people who look at crypto currency as an alternative investment. What is your take on crypto currency? Do you advise people to invest in it?
I would rather call it a distributed ledger. It’s a concept where you can establish ownership of something that other people can also see. That’s different from the bank ledger, you have the bank book and no one else can look at it, whereas in case of distributed ledger, the world can see it. I think that the world is moving in that direction, the idea that I can have something and I can trade it with you and you and I can establish that and we can be sure that there is ownership. So I think there is real interest in that.
Is it an investment? I don’t understand yet, why Bitcoin is an investment. Other than the fact that I might buy one because I think it will go up in values, but if you ask me why, I will not be able to explain that. So in my view it is going to catch-on, we may see more of it, but right now I would not advise investing in Bitcoin.
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