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The 101 on Alternative Offshore Investment

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Not many of us are aware that we can invest overseas in the form of offshore investment. An offshore investment is an investment in another country of which we are not a resident of that particular country. Offshore jurisdictions are used to pay less tax in many countries.

We caught up with YH Wong who has over two decades of experience in the financial services industry to find out more about offshore investment.

Q1. In the offshore world, the alternative theme has become more common. More investors are talking about including alternative investments in their portfolios. What are alternative investments and their role in portfolio diversification?

Alternative investments are assets that are not considered conventional assets like stocks, bonds and cash. Alternative offshore investments include venture capital, private equity, hedge funds, real estate investment trusts, commodities as well as real assets such as precious metals, rare coins, wine, and art.

If you live long enough, you see everything. Most people understand how important it is to diversify their investment portfolios. Proper diversification requires more than a traditional allocation to stocks and bonds. One of the biggest strengths of most alternative investments is their absolute performance which is often illustrated by their low correlation to certain asset classes.

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Q2. We have come across some negative articles about alternatives like hedge funds: they are risky, performance is poor, and they are suffering redemptions and some are even shutting down. What’s your view on this from your experience dealing with alternative investments?

There is a very long education which needs to happen. There are so many wrong assumptions about hedge funds – like they are high-risk vehicles, that you will burn all your money at some stage, that they are taking too much leverage and that there are many uncalculated risks. Of course, some funds fall into some of these categories but they do not represent the entire industry.

There is a certain mismatch of expectations in terms of performance. People really need to be clear what types of characteristics they are really looking for when they plan to use hedge funds in their portfolios. Also, please remember that even the good managers will have periods of underperformance over time.

Another observation is that the hedge fund industry has become too crowded. Consolidation in the industry is a positive development.

Q3. So, does this mean that hedge fund managers and strategy selection will become even more important? Can you comment on the massive IT revolution that is sweeping the offshore world?

You are right. I’m always looking for niche strategies to generate portfolio alpha that matches the risk tolerance of my investors. A growing number of hedge fund managers today are just generating beta with very little alpha.

Everywhere you look, the signs of change are there. I am a big fan of using technology such as Artificial Intelligence, Big Data and Quantitative Trading to take advantage of market opportunities. There are a growing number of managers that are actively embracing innovation and, in doing so, they are creating new opportunities for competitive advantage.

Q4. What about hot-button issues like the fees?

There are some specialist managers who don’t exist in big numbers and who actually do very interesting things that can’t be replicated easily. Under this situation, fees become less relevant because investors enjoy solid performance after fees.

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Q5. How are managers of different sizes coping with the competition in the industry these days?

It is always easy for well-known and big names to attract assets compared to the smaller guys. Things are even more difficult for the young ones mainly due to the costs involved when setting up their whole business and fulfilling all the regulations. Without naming anyone here, most smaller managers are able to perform better than their larger competitors in most measures.

Q6. What is the common due diligence process for any investors looking for new alternative managers?

I am a big advocate of proper and extensive due diligence. Whether you are investing in stocks, bonds or alternative investments, always make sure you perform your due diligence.

Due diligence should fit in independent, bottom up, qualitative, quantitative, and operational analysis. The on-going monitoring is as important as the initial due diligence. As for me, personal touch with the managers is very important where I am able to sit down with them if needed.

Q7. The alternative investment industry is changing more than ever before, and a lot of that is driven by the regulators. Can you comment on this?

Regulation has become much stricter at a time when the financial institutions themselves started to have more reporting and controlling. It is encouraging when you see players and regulators working together to promote and achieve something. Being part of a strong regulatory framework is an advantage for investors as well as managers.

Q8. Some investors are talking about higher risk in the markets in the coming months. What is your advice for the average investors?

Well, at some point we will experience a correction or even a meltdown with a real dislocation of the markets. Nobody knows what is going to happen. What you can do is proper diversification of managers, strategies and underlying factors.

Hedge funds that can weather the storm make great sense for investors. For those looking to impress the pretty girls next door, long volatility can be an interesting diversifying strategy for portfolios.

YH Wong has over two decades of experience in the financial services industry. His clients include high net worth investors and boutique institutions such as family offices and investment partnerships in the region. He is currently a senior partner with Satori Consultancy Ltd, a financial services company regulated by the Mauritian Financial Services Commission. He can be reached at yhwong@satoriconsultancy.com.

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