4 questions to ask yourself before investing in alternative investments

June 27

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Over the past few years, I've noticed that Singaporeans have gotten more savvy with managing their personal finances and have gotten more sophisticated in their investment choices. Because of that, we are seeing more and more alternative investments being introduced to Singaporeans.

I think it's a good thing because we are exposed to more investment options that can grow our wealth, sometimes at a lower cost compared to past investment options.

But what exactly are alternative investments?

“An alternative investment is an investment in any asset class excluding stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, exchange funds, carbon credits, venture capital, film production, financial derivatives, and cryptocurrencies.”

In this article, I'd like to broaden the discussion by including alternative investment platforms such as robo advisory and peer to peer lending platforms. In my opinion, alternative investment platforms can be just as risky as alternative investments.

I came up with these 4 questions when I think back on some of my alternative investments that I have made in the past. In full disclosure, if I had asked myself these 4 questions and thought through the entire thing, I may not have invested in some of them or would have done them in a different (or smarter) way.

Question 1: Do you have access to credible information and experts?

The challenge with alternative investments are that they are usually newly launched in Singapore and it is challenging to find credible information about them, not to mention experts in the subject. But the ideas are often not new and similar alternative investments would have already been launched in other developed markets such as United States.

If that is the case, are you able to find articles and videos about such alternative investments to help you both make a better informed decision in deciding whether to invest and strategise your investment strategy for a higher chance of success.

The worst decision you can make are the ones solely based on people who are marketing the alternative investments or alternative investment platforms. You may attend webinars or free 'masterclasses' conducted by them to understand how the alternative investment or alternative investment platforms work, but you must not fall for the seemingly insane discounts pitched to you to incentivise you to make the investment on the spot.

You must bear in mind that these people conducting these events have baked-in conflict of interests because they represent these alternative investments or alternative investment platforms and they will only say positive things to induce you into investing. Remind yourself that they are simply salesman and are not the experts.

You should seek out third party information and experts with no baked-in conflict of interests to truly understand the pros and cons of the alternative investment and alternative investment platforms.

Here's a real story of mine.

A few years ago, there was a popular alternative investment with many Facebook ads promoting the idea of how one can own 20 properties with no cash. The headline sounded really nice and the idea of being able to invest without a large amount of cash was really great for someone like me who had limited capital.

Fortunately, I have a number of friends working as property agents and they were able to explain to me that such schemes often require investors to band together to co-own cheap commercial/industrial properties and share the rental earned. Unfortunately, these commercial/industrial properties are cheap because they are either nearing the tail end of their lease, or are undesirable due to other reasons. That means these properties have limited potential for capital gain and that they may even have to be sold at a loss at the end.

With such information provided to me by friends who have insider knowledge and no conflict of interest, I avoided the alternative investment like a plague. To date, I have not heard of anyone who managed to exit the investment successfully with a profit.

Question 2: Is the investment made under your own name?

When investing in alternative investments and investing through alternative investment platforms, I feel that it. is very important for the investment to be made under your name. Legal proof of ownership matters when things don't work out and you need to recover your losses quickly.

Let me list a few scenarios.

Scenario

You have co-purchased a property investment with 9 other strangers under a company name and hold equal shares in the company, do you really have legal ownership of the property?

Problem

Technically, no. If everything goes well and the property was sold at a profit, everyone will receive an equal split of the profits and celebrate. But if the property drops in value and all 10 co-owners have disagreements on whether to hold or sell the property?

What's worse is you're the only one who wants to sell the property because you realise that the investment strategy is flawed while the rest of the co-owners want to hold on to the property? You become a minority shareholder in a company with limited power and you can only watch as your investment continues to plummet in value.

Scenario

You opened an account with an alternative investment platform (robo advisor) to invest in a portfolio of ETFs that they recommended based on your risk assessment. However, the robo advisor creates a single custodian account under their corporate name and commingled all the investors' funds together. An internal ledger is maintained by the robo advisor and records how many shares of each ETF is owned by each investor. Do you really have legal ownership of your investment?

Problem

Assumably yes. As a customer, you have access to the robo advisor and you can send buy and sell instructions to them to make changes to your investment portfolio. The problem is the lack of transparency. Did the platform actually follow your instructions as a customer in the first place?

For robo advisors who spent the time and effort to set up individual brokerage accounts for their customers, those customers will receive updates from their brokerages for each transaction performed by the robo advisor on their behalf. But for you, how are you able to verify that your robo advisor really performed what you have instructed?

More Problems

Most robo advisors are also startups with limited funding. They will need to consistently seek funding from investors because once their funding chain breaks and they run out of money, they will be forced to shut down. The exit strategy for most startups are usually to get acquired by more established businesses because that's when the founders get well rewarded for their efforts.

We've seen the example of Smartly in Singapore where the founders were rewarded for their efforts when the startup was acquired by Vietnam-based investment company VinaCapital in late 2019 and 2 of the founders left while 1 stayed on as a consultant for VinaCapital. Smartly was subsequently shut down in early 2020 and because all the investors' funds were commingled together, investors were forced to liquidate their investment portfolio. Timing didn't help as it was probably one of the worst time to sell their shares and all the investors had to realise their paper losses, even if they had holding power.

Question 3: Is there a proven exit strategy in place?

Another challenge faced by alternative investments is the lack of a proven exit strategy.

When a property in a foreign country is being promoted to you by a licensed agent or developer, you will hear them tell you all the good things about the property and sell you on the future potential of the property. Because they have baked-in conflict of interests, you will never hear about the risks and dangers of investing in that property in a country that you may not even have visited.

My question to you is, have you met or even heard of anyone who have managed to make profit off selling their property in the same location? If the answer is no, how can you be sure that you can definitely make a profit off your property investment?

If you can't be sure that you will make a profit, does it mean you should not make the investment? Unfortunately, the answer is not that clear cut.

Sometimes, It may be possible that there are some legitimate alternative investments that are venturing into uncharted waters that it takes a long time before you can find any cases of proven exit strategy.

If you still wish to invest in these uncharted waters because the payoff could be huge, you should only invest money that you can afford to lose.

Question 4: Is the alternative investment or alternative investment platform regulated by MAS?

Monetary Authority of Singapore (MAS) is the integrated regulator and supervisor of financial institutions in Singapore. MAS establishes rules for financial institutions which are implemented through legislation, regulations, directions and notices. Guidelines have also been formulated to encourage best practices among financial institutions. Combined with close supervision, these instruments help MAS achieve the outcome of a sound and progressive financial services sector.

Since this article is focused on investments, you should examine the Capital Markets licensing and regulations implemented by MAS so far.

While MAS is not perfect, I'd like to think of MAS as a gatekeeper for dodgy investments. I will stay far away from alternative investments and alternative investment platforms that can't even get past the gatekeeper.

For a start, I'd use MAS's Investor Alert List to check if the alternative investment or alternative investment platform is listed. Do note that if the alternative investment or alternative investment platform is relatively new in Singapore, it may take some time before they make it into this list.

That is just the preliminary line of defence.

First of all, I would strongly recommend to only invest in alternative investments and alternative investment platforms with MAS capital market licenses because they will be held liable by MAS if they violate MAS regulations.

But of course, there are ways to avoid getting listed in Investor Alert List and not be required to hold a MAS capital market license.

There are some companies who market alternative investment ideas to consumers, hand-holding them step-by-step to execute the investment while earning revenue along the way. They disguise themselves under the pretext of financial education so that they do not fall under MAS's licensing and regulation policies.

These are the companies that we need to beware of because there is nothing stopping them from packing up and disappearing any time. Needless to say, there's no way for you to seek recourse if your investment fails, even if you go protest at Hong Lim Park.

There will always be new alternative investments

I hope this article does not scare you into avoid all alternative investments. As technology improves and the market becomes more efficient, there will always be new alternative investments and alternative investment platforms for investors to choose from.

What's important is we scrutinise each alternative investment carefully and objectively, speak to trusted experts who have no baked-in conflict of interests to understand the pros and cons of the investment before we make any decision with our money.

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About the author 

Mickey J

Mickey is your typical white-collar Singaporean who works regular hours in a job with a strong passion on personal finance. He writes mostly about personal finance, investing, insurance and retirement planning. He also embraces the Financial Independence and Retire Early movement (FIRE), tweaking the FIRE concept to his lifestyle.

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