Understanding Alternative Investments and Risk Management
From the desk of Jim Eccleston at ÍøÆسԹÏ
Alternative investments once again are gaining traction, according to a recent article in InvestmentNews. To explain why, the publication interviewed Kirk Chisholm, a wealth manager and principal at Innovative Advisory Group. He sees the rise of alternative investments as a response to periods of market instability. According to Chisholm, when traditional markets like Wall Street lose investor confidence, alternative investments gain traction. InvestmentNews reports that this pattern has played out repeatedly, with different asset classes gaining popularity during economic uncertainty only to recede as markets stabilize.
Chisholm identifies the early 2000s as a pivotal moment when hedge funds surged in popularity. Investors were drawn to the hedging aspect, particularly during market downturns, only to lose interest as markets rallied. This cyclical trend continued with other alternative assets like managed futures, which similarly gained attention before becoming "watered down" by mainstream interest.
Chisholm sees private equity and private credit as the leading trends in alternative investments. However, he stresses a clear distinction between Wall Street’s alternatives and those found on the private side, which include real estate and private mortgages. Chisholm told InvestmentNews that these private investments tend to exhibit more stability, with investors remaining consistent in their focus despite market trends.
Chisholm’s perspective on risk is another key area of interest. He emphasizes that many investors conflate risk with volatility. Volatility, he explains, refers to short-term price fluctuations, while risk is the potential for a permanent loss of capital. According to Chisholm, true risk management involves identifying all potential risks, mitigating as many as possible, and accepting what remains.
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