Navigating the maze: Active management vs. passive exposure in alternative investment strategies
Explore the benefits of a passive investment strategy in real estate private debt through a fund for protection against market volatility.
The Australian alternative investment market is gaining popularity. With traditional asset classes like stocks and bonds experiencing high volatility and, more recently, positive correlation, investors are increasingly turning to alternative investment strategies for diversification. For investors considering an alternative investment strategy, such as an allocation to real estate private debt, a common question often presents itself: active management or passive exposure?
The allure of an investment in an alternative asset class
The alternative investment landscape encompasses a diverse range of assets beyond traditional stocks and bonds. These include private equity, venture capital, hedge funds, private debt, among which real estate private debt and commercial real estate debt are subsets, infrastructure, commodities and more. According to the Australian Investment Council, the gross value of Australian alternative assets under management (AUM) reached a record high of AUD$1.2 trillion in December 2022. This growth signifies a growing appetite for alternative investments among Australian investors seeking higher potential returns and portfolio diversification.
Active management: A hands-on approach
Active management involves directly selecting and managing individual alternative investments yourself. This approach typically requires an investor to actively research potential investments, perform due diligence, negotiate terms, and manage the investment throughout its investment term.
Pros of active management:
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Tailored portfolio: Active investment management can mean that investors are able to construct a portfolio customised to their specific risk tolerance and investment goals.
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Direct control: Investors are able to retain full control over the selection and management of individual investments.
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Expertise required: Successfully navigating the alternative investment landscape requires a deep understanding of different asset classes, market dynamics, and risk management strategies. This expertise is often beyond the capabilities of individual investors.
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Time commitment: Active management demands significant time and effort for research, due diligence, and ongoing monitoring of investments.
Passive exposure: Investing through funds
Investing in a fund managed by professional investment managers, is one form of passive investment in an alternative asset class. Income-generating, real estate private credit funds pool capital from multiple investors to invest in a diversified portfolio of alternative assets aligned with the respective fund’s stated strategy.
Depending on an investor’s situation and objective, investors can select from one of two Fund types:
- Pooled Funds: For investors looking to invest via the security of a lending trust, pooled funds offer investors a fractional ownership interest of the Fund’s interest in the Trust’s underlying assets, proportionate to the investor’s investment in the Fund.
- Unitised Fund: For financial advisors looking to increase their clients’ allocation to private debt, a Unitised Fund provides a compelling alternative to earn regular, determinable income.
Pros of passive exposure:
- Convenience: Fund managers handle the selection, due diligence, and ongoing management of individual investments. This frees up your time and resources, eliminating the need to wait for and select individual investment opportunities.
- Diversification: Investors who choose to invest in a professionally managed alternative investment fund, such as pooled or unitised private debt funds, can leverage the natural diversification from the specifically curated mix of loan types, purpose, locations and sectors.
- Accessibility: Funds can make alternative investments more accessible to a broader range of investors with lower minimum investment requirements compared to direct deals.
- Limited control: Investors have no control over the specific investments held within the fund.
Why passive exposure to alternative investments via a private debt fund deserves consideration by income-seeking investors
While active management can be beneficial for wholesale/sophisticated investors with in-depth knowledge and significant capital, the benefits of passive exposure through funds generally outweigh the time intensive nature of active management for many investors.
Passive exposure to alternative investments, such as through a private debt fund, offers income-seeking investors a compelling opportunity. Private debt funds provide access to a diversified pool of loans and credit transactions, which can generate steady, reliable income streams. Real estate private debt funds are managed by experienced professionals who handle the complexities of due diligence, selection, and ongoing management. This not only reduces the time and effort required from investors but also leverages the expertise of fund managers to mitigate risks and enhance returns. Additionally, private debt funds can often offer higher yields compared to traditional fixed-income securities, making them an attractive option for those looking to boost their income potential.
The benefits of a reputable fund manager
Real estate private debt is a specialised asset class that requires a specialist investment manager with deep expertise and a core focus on risk management.
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking groups in South Africa, CEO of South Africa’s third largest private client wealth manager, Director of a Superannuation Risk and Operations consultancy, a consultant to Westpac, and as MD of a ‘home loan over the phone’ business established for Real Insurance and Macquarie Bank. He has consulted widely to owner-managed businesses across strategy, technology and operations and co-founded Zagga in 2016, where he is a Member of the Zagga Investment Risk Committee, Zagga Credit Oversight Committee, and Zagga Compliance Committee, and a Responsible Manager (AFSL / ACL).
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This article is for information purposes only. It does not take into account your objectives, financial situation or needs. Any opinion expressed in this article are of the author and is subject to change without notice. Readers are reminded to exercise caution and use their own judgment when interpreting and applying the information contained in this article.
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking...
Expertise
No areas of expertise
Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking...
Expertise
No areas of expertise
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