Analyzing Investments

Jun 10, 2013 by

The popular American stock market analysis website Seeking Alpha recently published an article comparing the failure of people to go to the gym despite purchasing annual memberships, to the failure of people to diversify their investments. Author Dan Morillo notes that individuals suffer from overconfidence, enabling themselves to believe that they will use their yearly gym membership, despite published evidence that reports the contrary. That overconfidence can transfer to the investment sphere as well, creating “home bias”, or the tendency to purchase stocks that originate in one’s home country, despite evidence highlight the success of diversified portfolios. Morillo recommends expanding one’s portfolio and research to include global companies. Even though they may be more unfamiliar, they could have better returns.

Other potential investments can fall under the category of alternative investments, and include non-securities such as commodities, hedge funds, and non-traditional investments like precious metals or film production. Investment firm EnTrust Capital, managed by Gregg Hymowitz, specializes in alternative investments for high net worth individuals, public and corporate pension funds, foundations and endowments.

A paper titled “Competition Among University Endowments” written by William Goetzmann and Sharon Oster of the Yale School of Management highlights the growing trend among universities of reallocating their assets to varying forms of alternative investments. Often time this reallocation takes the form of hedge funds and is fueled by growing competition among universities to effectively manage their endowment funds to receive the best return.  In determining whether the relocation is beneficial in the long-run, the paper notes,

“If the returns to marketable alternatives continue as they have historically, then the competition will have been a good thing. If, on the other hand, markets are efficient – or at least access to managers who can take advantage of inefficiencies for the benefit of clients is limited, then this shift may have long-term costs,”

Along with endowments, pension funds are also seeking alternative investments, and will be the largest contributors to growth in the hedge fund industry in 2013.

Sources: Seeking Alpha , AiCio

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