{"id":3656,"date":"2014-04-07T06:04:51","date_gmt":"2014-04-07T13:04:51","guid":{"rendered":"http:\/\/staging-prblog.paladinregistry.com\/blog\/?p=3656"},"modified":"2014-04-07T06:04:51","modified_gmt":"2014-04-07T13:04:51","slug":"considering-alternative-asset-classes","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/","title":{"rendered":"Considering Alternative Asset Classes?"},"content":{"rendered":"

\"alternative<\/a>Over the past 5 to 10 years \u2018alternative investments\u2019 have been gaining more traction in investor\u2019s portfolios. The main reason for holding these \u2018alternative\u2019 asset classes<\/a> in a portfolio is to reduce risk (via low correlations to stocks and bonds) without sacrificing returns. Some have argued you can both reduce risk and increase<\/i> returns by holding \u2018alternatives\u2019 in a portfolio.<\/p>\n

Many investors have now included real estate, commodities, managed futures, long-short funds, and other \u2018alternative\u2019 assets within portfolios in hope of achieving this purpose. Although some of these asset classes have merit in a portfolio, the vast majority have at least one of the following problems:<\/p>\n

    \n
  1. move right along with stocks when you need diversification<\/a> the most (2008) or<\/li>\n
  2. over the long term do not provide attractive positive returns.<\/li>\n<\/ol>\n

    There is one asset class that our firm has identified that does not seem to possess either of these portfolio harming traits, Insurance Linked Securities<\/a>.<\/b> This asset class is composed of securities issued by governments or insurance companies where the issuing entity transfers some of their risk to investors in exchange for a commensurate rate of return. These \u2018risks\u2019 can be anything from hurricanes, floods, earthquakes, marine hazards, airline crashes, etc. Over the past 2 decades returns have been similar to equities with much less risk and showing no correlation to stocks or bonds <\/b>(including 2008). The two main types of insurance linked securities are detailed below:<\/p>\n

    Catastrophe bonds\u00a0<\/a>are very short term floating rate (2-3 year) bonds issued by governments or insurance companies that are seeking to remove insurable risk \u2018off their books\u2019. In exchange for accepting this risk they offer competitive yields (6% \u2013 8%\/yr. average) which are immune from interest rate and credit risk. The only trigger that will cause a loss of principal is a disaster that causes a certain level of insurable losses.<\/b>\u00a0This of course has no correlation with any other financial asset.<\/p>\n

    Quota Share\u00a0<\/a>is an actual slice of an insurance company\u2019s business (incoming premiums minus outgoing losses). This type of security has a higher expected return than catastrophe bonds (8% \u2013 10%\/yr. average returns) but with a higher level of risk\u00a0individually.<\/i>\u00a0However if you compile a largely diversified basket of these shares you can reduce risk substantially. This is exactly what we are doing (investing in more than 20 unique quota shares) that span risks from Super Bowl cancellation, satellites, natural disasters, pandemics, agriculture, marine, and air travel risk.<\/p>\n

    While a typical investor has significant exposure to \u2018stock market\/economic\u2019 risk and some have large exposure to \u2018interest rate\u2019 risk; <\/b>very few have any exposure to \u2018insurance risk\u2019. By introducing this other type of risk that is not correlated to either the economy or interest rates we can significantly reduce risk and not sacrifice overall returns.<\/p>\n

    No asset class is perfect however, so all investors should be aware of a couple important concerns unique to these investments.<\/p>\n

    All-Or-Nothing Payoff:<\/b> In the case of catastrophe\u00a0bonds, the vast majority will be an all or nothing proposition in terms of\u00a0payoff. If the bond triggers are not met the investor (in the vast\u00a0majority of cases) gets 100% of their principal returned with full\u00a0interest, but if a triggering event does occur the investor will most\u00a0likely lose 100% of their principal. This makes holding any 1 bond extremely\u00a0risky and unadvisable<\/i>. Therefore we invest through a fund that holds\u00a0many diversified bonds so if any 1 security does trigger it will have a\u00a0small impact overall.<\/p>\n

    Modeling Risks:<\/b> With both quota share and\u00a0catastrophe bonds the climate\/weather modeling that \u2018creates\u2019 the agreed\u00a0upon underlying investment return\/risk metrics are not perfect and are\u00a0very long term orientated. What this combination creates in the short term\u00a0are results that will deviate largely from long term modeled outcomes.\u00a0\u00a0Modeling is getting better however, and if you hold enough diversified\u00a0investments the risk of any one event being modeled incorrectly is greatly\u00a0mitigated.<\/p>\n

    Limited Liquidity: <\/b>Liquidity is more of an issue\u00a0with quota share than catastrophe bonds, as we hold catastrophe bonds\u00a0through a normal open end mutual fund we can sell at any time. Even though\u00a0our quota share will be held through an open end fund as well, it will\u00a0only have quarterly liquidity, as quota share itself does have little\u00a0interim liquidity. As an investment the timeline for the funds should be no\u00a0less than 3-5 years anyway as it is important to hold through a full\u00a0insurance premium cycle.<\/p>\n

    To learn more about Eric Mancini, view his Paladin Registry profile<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

    Over the past 5 to 10 years \u2018alternative investments\u2019 have been gaining more traction in investor\u2019s portfolios. The main reason for holding these \u2018alternative\u2019 asset classes in a portfolio is to reduce risk (via low correlations to stocks and bonds) without sacrificing returns. Some have argued you can both reduce risk and increase returns by holding \u2018alternatives\u2019 in a portfolio. Many investors have now included real estate, commodities, managed futures,<\/p>\n","protected":false},"author":38,"featured_media":3659,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-3656","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"\nConsidering Alternative Asset Classes?<\/title>\n<meta name=\"description\" content=\"Alternative investments are gaining more traction in investor\u2019s portfolios. These \u2018alternative\u2019 asset classes may reduce risk without sacrificing returns.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Considering Alternative Asset Classes?\" \/>\n<meta property=\"og:description\" content=\"Alternative investments are gaining more traction in investor\u2019s portfolios. These \u2018alternative\u2019 asset classes may reduce risk without sacrificing returns.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/\" \/>\n<meta property=\"og:site_name\" content=\"Paladin Registry Blog\" \/>\n<meta property=\"article:author\" content=\"https:\/\/www.facebook.com\/TraphagenFinancialGroup\" \/>\n<meta property=\"article:published_time\" content=\"2014-04-07T13:04:51+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"620\" \/>\n\t<meta property=\"og:image:height\" content=\"360\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Eric Mancini\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@PaladinRegistry\" \/>\n<meta name=\"twitter:site\" content=\"@PaladinRegistry\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Eric Mancini\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/\",\"url\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/\",\"name\":\"Considering Alternative Asset Classes?\",\"isPartOf\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg\",\"datePublished\":\"2014-04-07T13:04:51+00:00\",\"dateModified\":\"2014-04-07T13:04:51+00:00\",\"author\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/b0b6f29dd6c22272b085f589b0711e16\"},\"description\":\"Alternative investments are gaining more traction in investor\u2019s portfolios. These \u2018alternative\u2019 asset classes may reduce risk without sacrificing returns.\",\"breadcrumb\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#primaryimage\",\"url\":\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg\",\"contentUrl\":\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg\",\"width\":620,\"height\":360},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.paladinregistry.com\/blog\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Investing\",\"item\":\"https:\/\/www.paladinregistry.com\/blog\/category\/investing\/\"},{\"@type\":\"ListItem\",\"position\":3,\"name\":\"Considering Alternative Asset Classes?\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#website\",\"url\":\"https:\/\/www.paladinregistry.com\/blog\/\",\"name\":\"Paladin Registry Blog\",\"description\":\"Helping You Make Better Financial Decisions\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.paladinregistry.com\/blog\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/b0b6f29dd6c22272b085f589b0711e16\",\"name\":\"Eric Mancini\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/eric-mancini-96x96.jpg\",\"contentUrl\":\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/eric-mancini-96x96.jpg\",\"caption\":\"Eric Mancini\"},\"description\":\"Eric D. Mancini is a Certified Financial Planner (CFP\u00ae) and the director of investment research at Traphagen. Eric graduated Penn State University with a BS in Economics and specializes in portfolio management, investment analysis, and personal financial planning. He also works with clients on insurance planning, tax planning, and personal income tax preparation. Eric has obtained the Certified Financial Planner (CFP\u00ae) designation, the NASD (National Association of Securities Dealers) Series 65 license, the NJ Life and Health Insurance license, and is currently pursuing his CFA\u00ae (Chartered Financial Analyst) designation.\",\"sameAs\":[\"http:\/\/www.tfgllc.com\",\"https:\/\/www.facebook.com\/TraphagenFinancialGroup\",\"https:\/\/www.linkedin.com\/company\/1071069?trk=tyah&trkInfo=tastraphagenidx2-1-6\"],\"url\":\"https:\/\/www.paladinregistry.com\/blog\/author\/eric-mancini\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Considering Alternative Asset Classes?","description":"Alternative investments are gaining more traction in investor\u2019s portfolios. These \u2018alternative\u2019 asset classes may reduce risk without sacrificing returns.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/","og_locale":"en_US","og_type":"article","og_title":"Considering Alternative Asset Classes?","og_description":"Alternative investments are gaining more traction in investor\u2019s portfolios. These \u2018alternative\u2019 asset classes may reduce risk without sacrificing returns.","og_url":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/","og_site_name":"Paladin Registry Blog","article_author":"https:\/\/www.facebook.com\/TraphagenFinancialGroup","article_published_time":"2014-04-07T13:04:51+00:00","og_image":[{"width":620,"height":360,"url":"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg","type":"image\/jpeg"}],"author":"Eric Mancini","twitter_card":"summary_large_image","twitter_creator":"@PaladinRegistry","twitter_site":"@PaladinRegistry","twitter_misc":{"Written by":"Eric Mancini","Est. reading time":"4 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/","url":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/","name":"Considering Alternative Asset Classes?","isPartOf":{"@id":"https:\/\/www.paladinregistry.com\/blog\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#primaryimage"},"image":{"@id":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#primaryimage"},"thumbnailUrl":"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg","datePublished":"2014-04-07T13:04:51+00:00","dateModified":"2014-04-07T13:04:51+00:00","author":{"@id":"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/b0b6f29dd6c22272b085f589b0711e16"},"description":"Alternative investments are gaining more traction in investor\u2019s portfolios. These \u2018alternative\u2019 asset classes may reduce risk without sacrificing returns.","breadcrumb":{"@id":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#primaryimage","url":"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg","contentUrl":"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/alternative-asset-class.jpg","width":620,"height":360},{"@type":"BreadcrumbList","@id":"https:\/\/www.paladinregistry.com\/blog\/investing\/considering-alternative-asset-classes\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.paladinregistry.com\/blog\/"},{"@type":"ListItem","position":2,"name":"Investing","item":"https:\/\/www.paladinregistry.com\/blog\/category\/investing\/"},{"@type":"ListItem","position":3,"name":"Considering Alternative Asset Classes?"}]},{"@type":"WebSite","@id":"https:\/\/www.paladinregistry.com\/blog\/#website","url":"https:\/\/www.paladinregistry.com\/blog\/","name":"Paladin Registry Blog","description":"Helping You Make Better Financial Decisions","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.paladinregistry.com\/blog\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/b0b6f29dd6c22272b085f589b0711e16","name":"Eric Mancini","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/image\/","url":"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/eric-mancini-96x96.jpg","contentUrl":"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/04\/eric-mancini-96x96.jpg","caption":"Eric Mancini"},"description":"Eric D. Mancini is a Certified Financial Planner (CFP\u00ae) and the director of investment research at Traphagen. Eric graduated Penn State University with a BS in Economics and specializes in portfolio management, investment analysis, and personal financial planning. He also works with clients on insurance planning, tax planning, and personal income tax preparation. Eric has obtained the Certified Financial Planner (CFP\u00ae) designation, the NASD (National Association of Securities Dealers) Series 65 license, the NJ Life and Health Insurance license, and is currently pursuing his CFA\u00ae (Chartered Financial Analyst) designation.","sameAs":["http:\/\/www.tfgllc.com","https:\/\/www.facebook.com\/TraphagenFinancialGroup","https:\/\/www.linkedin.com\/company\/1071069?trk=tyah&trkInfo=tastraphagenidx2-1-6"],"url":"https:\/\/www.paladinregistry.com\/blog\/author\/eric-mancini\/"}]}},"_links":{"self":[{"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/posts\/3656"}],"collection":[{"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/users\/38"}],"replies":[{"embeddable":true,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/comments?post=3656"}],"version-history":[{"count":6,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/posts\/3656\/revisions"}],"predecessor-version":[{"id":3664,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/posts\/3656\/revisions\/3664"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/media\/3659"}],"wp:attachment":[{"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/media?parent=3656"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/categories?post=3656"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.paladinregistry.com\/blog\/wp-json\/wp\/v2\/tags?post=3656"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}