SINGAPORE (July 2): Financial blogger Kevin was over the moon when he found out about new private equity bonds for retail investors issued by Azalea Investment Management, a unit of Temasek Holdings. Believed to be the first of its kind in the world, the Astrea IV bonds are backed by cash flows from a US$1.1 billion ($1.5 billion) portfolio of 36 private equity funds. Retail investors needed to fork out just $2,000 to buy into the so-called Class A-1 tranche, which carries a relatively modest coupon of 4.35% per annum. To be sure, there are higher-yielding products around, but the attraction of Astrea IV lies in its novelty.

Kevin, who says on his blog that he used to be a “corporate lawyer who drafted IPO prospectuses for a living”, recalls that he was “absolutely enthralled” when he first heard about Astrea IV. He wrote several lengthy pieces on his blog, Financial Horse, and says he appreciates the fact that Azalea has structured something new and innovative specially for retail investors. “I have little doubt that [Azalea] could have easily gone straight to institutional investors [instead] and filled their books many times over,” says Kevin, who declined to give his full name.

Investors such as Kevin may have more reason for excitement as retail investors gained another investment opportunity previously available only to sophisticated investors and institutions. On June 20, United Overseas Bank Asset Management announced that it was setting up its first fund, offering retail investors exposure to alternative investments.

The United Asia Pacific Diversified Strategies Fund (DSF), a new daily liquidity alternative investment fund, will invest in asset classes such as hedge funds, with the bulk of its investments focused in Asia-Pacific. The minimum investment sum is just $1,000 or US$1,000. The fund is measured against an absolute return benchmark of 6% per annum. It is sub-managed by UOB Alternative Investment Management (UOBAIM).

Low Han Seng, CEO of UOBAIM, says retail investors here are more aware and interested in opportunities beyond traditional asset classes such as stocks and bonds. “The development of liquid alternative funds in the US and Europe has really created what we call the democratisation of alternative investments to retail investors. These strategies, which in the past had been the domain of sophisticated investors, are now accessible to retail investors,” he says.

Both the Astrea IV bonds and the United Asia Pacific DSF are examples of “innovative structures” that have been created to provide retail investors with more investment options, notes Justin Ong, Asia-Pacific asset and wealth management leader at PwC Singapore. “We expect to see more of such innovative products being introduced into the marketplace,” he says.

Victor Wong, director of wealth management at Financial Alliance, concurs. He sees the floodgates opening for such investment products. “I think this is just the beginning.”

Why are asset managers more willing to open up such products to the public, and what is driving demand for them? As more of such products come to the market, what should retail investors be mindful of?

Not then, so why now?

To be sure, alternative asset classes such as hedge funds and private equity are not new to the market. But, as retail investors gain a better understanding of these products and become keen on them, asset managers are happy to provide. Low of UOBAM says, “We felt [in the past] that retail investors might have difficulty understanding these strategies, and if they don’t understand them, it may not be the right thing to do, to introduce it to them.”

UOBAM also says it has taken steps to ensure the fund is palatable for retail investors. One important aspect is the daily liquidity feature, which allows flexibility in buying and selling units. Another is that the majority of the United Asia Pacific DSF’s underlying alternative funds will be regulated under the Undertakings for Collective Investments in Transferable Securities, a European Union regulatory framework. UCITS funds are generally regarded as being more well-regulated and hence safer, Low notes. “This structure is more suited for retail investors from the point of view of risk management and transparency,” he says.

Low adds that the fund will select its constituents based on the capabilities and track records of the fund managers of the underlying funds. A good hedge fund manager, for instance, would be able to generate positive returns or minimise losses even during a global downturn, reducing volatility for investors. In its press release, UOBAM cites Bloomberg data stating that Asian alternative investment funds had an annualised return of 7.9% between Jan 1, 2006 and Jan 31, 2018, beating the annualised returns of Asian equities and bonds of 5.8% and 3% respectively.

In the case of the Astrea IV bonds, Azalea says private equity has become attractive as an asset class for retail investors. “This is an asset class that we felt couldn’t be ignored, and it is an asset class that has performed well and generated good returns for investors,” said Chue En Yaw, Azalea managing director and head of private equity funds, at a June press conference.

Indeed, the sheer volume of private equity funds has been staggering. According to data from Preqin, 452 Asia-based private equity and venture capital funds were closed last year, raising an aggregate US$99.7 billion in capital, an increase from US$87 billion the previous year.

Rainbow chips atop plain vanilla

While it is too early to gauge interest in UOBAM’s new fund, the Astrea IV bonds have seen overwhelming demand — with the bond issue 7.4 times subscribed. Close to $890 million worth of valid applications were received for the $121 million Class A-1 bond offering.

The hunt for yield is another driver of investors’ interest in these products, which are an added bonus, or option, on top of plain vanilla stocks and real estate investment trusts (REITs), notes Ben Fok, CEO of Grandtag Financial Consultancy (Singapore). “As our population is ageing, retirees will be looking for assets that can produce a regular income to supplement their retirement income,” he says.

Financial Alliance’s Wong says the turbulence in the global markets has made such products attractive to his clients. “Alternative asset classes provide good diversification benefit, and certain strategies, such as a good long-short equity strategy, are able to generate decent, consistent returns in volatile market conditions. Meanwhile, traditional asset classes such as stocks will struggle to generate positive returns,” he says.

Conversely, Ong of PwC says that perceived stability in market conditions could also be a factor in driving demand, as investors seek their alpha from these alternative investments. “Where market volatility is high, there is higher opportunity to capture excess returns from liquid exchange-traded investments,” he says.

All things considered, Kevin of Financial Horse reckons that the everyday investor in Singapore is also generally open to new asset classes. Following the listing of CapitaLand Mall Trust, the first REIT, in 2002, this asset class has become the mainstay of many portfolios. He reckons the same could happen with other new products such as the Astrea IV bonds. “Retail investors are a lot more discerning than we give them credit for. If there is a well-structured product with an attractive risk-reward, there will be strong demand [for it],” he says.

Fair game

As usual, the adage “buyers beware” applies. These newfound investment opportunities for retail investors also come with new caveats. The United Asia Pacific DSF, for instance, carries manager-specific risks, Low notes. “The managers have greater flexibility with the financial instruments and investment strategies they can deploy. This can introduce a different kind of risk, which will need to be assessed and managed. We have a long track record and a tested process of investing in this asset class,” he says.

Low argues that the fund can reduce risk arising from volatility in one’s portfolio. “The primary objective of alternative investments is to improve risk-adjusted returns by reducing volatility, which has historically been higher in the stock market than in alternative investment funds, which have a strong emphasis on downside mitigation and risk management. Secondly, these strategies tend to be less correlated to equities and bonds, thereby adding [greater] diversification to an investor’s portfolio,” he says.

Nevertheless, products such as a fund of hedge funds are still exposed to riskier investment strategies. “Hedge funds very often use speculative investment and trading strategies. Many hedge funds are honestly managed, and balance a high risk of capital loss with a high potential for capital growth. The risks hedge funds incur, however, can wipe out your entire investment. If you can’t afford to lose your entire investment, then perhaps hedge funds and funds of hedge funds are not for you,” reads an investor alert by the Financial Industry Regulatory Authority, which governs brokers and dealers in the US.

Meanwhile, investing in private equity products also carries a specific set of risks, notes Brandon Lam, Singapore head of the financial planning group at DBS Bank. For one, there is no clear valuation of the underlying investments, and quite often, there is a lock-in period. As a result, investors cannot liquidate or cash out from their holdings easily. Then of course, the time-tested caveat applies here too. “The potential for higher returns goes hand-in-hand with the potential for higher losses,” Lam notes.

Wong of Financial Alliance emphasises that at the end of the day, retail investors must still conduct their own due diligence. No one has greater responsibility over their money except themselves.

One key element to look out for is the fund manager’s track record. A longer history, spanning across the various cycles, will give potential investors a good idea of how these managers do, says Wong. On their part, investors should be careful not to put everything in one basket. “We do advocate that clients can have up to 30% exposure to alternative asset classes, as it helps to lower portfolio volatility while enhancing portfolio return,” he says.

From another perspective, the asset managers face more competition. Financial blogger Kevin reckons that young investors, with easy access to troves of information online, are willing to consider and invest in a wider variety of new products. Be it peer-to-peer lending, real estate crowdfunding or cryptocurrencies — these are all “fair game” to them, he says.

But at the end of the day, it is still back to basics. “There is no free lunch in investing… If the risk is too big for me to stomach, I will not make the investment, regardless of how attractive the potential returns are,” says Kevin.

This story first appeared in The Edge Singapore (Issue 837, week of July 2), which is on sale now. To subscribe, click here