show image

The robots bringing alternative investments to the masses

Online investment house CEO, Ophir Gertner, makes the case for alternative investments and robo-advisers usurping IFAs

Many investors are under the mistaken impression that by investing in bonds, equities and real estate, their portfolio is diverse. Until now, primarily due to restricted access, few have considered what many institutional investors utilize as a key diversification tool; namely alternative investments such as hedge funds or managed futures.

Much research has been undertaken into the performance of alternative investments compared to global market indices and one fact in particular stands out. During the fifteen worst quarters of the S&P 500 Index’s performance in the last 30 years, alternatives outperformed equities in all cases. The findings (see table below) clearly demonstrate the diversification benefits of including alternatives in an investment portfolio; alternatives were able to generate uncorrelated returns, faring much better than equities during the periods analysed. On average, alternative investments, as measured by the Barclay CTA Index (an index which analyses the performance of managed futures), performed 18.8 per cent better, and in one quarter, this figure was as high as 39 per cent.

chartAlternative investment products have seen extremely high growth in recent years, more than doubling in size since 2005, and based on these findings, it’s easy to see why.  The research clearly demonstrates the investment case for alternatives and the benefits of hedging your portfolio with them.

That said, up until recently, there have been very limited options for investors to gain access to this asset class for a number of reasons. Direct access to hedge funds and other alternative investments has been almost impossible for most retail investors due to very high minimum investments and regulatory hurdles. Another significant barrier cited by some critics, is the perceived complicated nature of alternative investments and the opaque nature of their structure.

Yet, I believe most strongly that it simply isn’t fair that advanced investment strategies should be restricted to institutional investors and very wealthy private bank customers. If someone’s pension has an allocation to hedge fund strategies, then why should an individual not have that same access?

The challenge for my business was to try and overcome all of these hurdles, offering the broadest possible access to hedge fund style investments, but in a manner designed to make the asset class easy to understand, with manageable fee structures. That was our mission several years ago, when the idea for invest.com first came about.

Ahead of launching invest.com, we undertook wide-ranging research into investors’ perceptions of alternative investments and what the vast majority tend to understand when it comes to investment products and financial markets. This information enables us on one hand to go beyond what the regulator requires in terms of transparency, accuracy and balance, and also to provide a service that encourages consumers to make reasoned, informed decisions about their investments. The use of the robo adviser, for example, gives a very clear recommendation to potential investors on the maximum they should invest, to encourage them to keep a balanced, diversified portfolio.

In fact, we believe that the use of robo advisers, a trend which is gaining significant traction in the industry at the moment, can offer significant benefits, beyond lower fees, to investors compared to IFA’s for this type of product. The adviser is able to digest more information in a second than a human is able to in a month, and, as such is able to take into consideration a vast amount of both client and market specific detail, thereby offering a tailored portfolio in alternatives to closely match their risk appetite, ensuring it fits within an investor’s wider portfolio of investments.

To overcome perceived risk, the strategies we have developed are fully-automated and include an optimisation layer which enhances the algorithms and adapts to market conditions. They are continuously monitored and incorporate several fail safes in the areas of investment performance, order management and broking. The strategies are designed to operate within strict risk parameters and will take profits to hit risk targets, while the underlying assets are extremely liquid, e.g. contracts on currencies, S&P 500 stocks. Each strategy invests in one asset class and is fully diversified so it can be used as a standalone investment for just £500.

Whilst we entirely appreciate that the notion of investing in hedge fund style strategies may be something new and different for retail investors to get accustomed to, we believe that not only do they offer true diversification benefits, but also that we are delivering a platform which has overcome the barriers associated with this asset class.

Ophir Gertner is the founder and CEO of invest.com