ALTERNATIVE INSTITUTIONAL INVESTMENTS and PERSONAL FINANCIAL PLANNING

To fully understand alternative investments and how they tie into personal financial planning,
we need to understand financial planning within the context of age and career demographics.
How does age affect personal financial planning and the assets or institutional instruments
everyday investors invest in?

The most common investments are stocks and/or government and corporate bonds. For the
most part, individual investors looking to invest will choose one or both, with income
allocations based on what they believe will be the better investment. People who are younger
and are just beginning life will usually have very few responsibilities and will look to more
speculative, higher yielding alternate investments than would older people with more
responsibilities. Even within the field of everyday investments, many people approaching
retirement are more likely to hold investments in fixed income securities rather than in
equities, especially because they want consistent cash flows long into retirement and also
because equity markets can face huge swings. In the same vein, those with more disposable
incomes, after investing in more common securities, will look to more enterprising securities
or investments, what we would call alternative investments.

Having established the circumstances under which people invest, we can look at a few
alternative investments and how they tie into personal financial planning

Perhaps the most common alternate institutional investment is the real estate investment
trust(RIET), which differs from traditional real estate investments in that the individual
investor does not actively purchase the properties ; rather, institutions will pool together
investors’ monies, buy a number of residential and/or commercial units, tokenize the
properties and retail these now-tokenized properties to the everyday investor. The benefits of
the REIT lie not only in the fact that individual investors do not have to manage properties but
also in diversification. REITs typically package for investors a mix of different commercial
(malls, warehouses, garages) and residential (housing units, apartments,) properties so that
the individual investor is not exposed to a single type of property classification.

For the individual investor who is investing either for short term goals such as funding his
education or for much more long term goals such as retirement , REITs can be good additions
to a diversified investment approach: they are basically traded as shares and have good
liquidity, a feature traditional real estate is infamous for. Here in Ghana, REITs are still
teething as an alternative asset class, and the players in that sandbox are very few. Republic

Electronic copy available at: https://ssrn.com/abstract=3644221

Bank has, among several funds, an actively managed REIT with portfolio investments in land,
commercial and residential real estate.

It is hard to miss the prevalence of digital and transfer-of-ownership currencies that have
been admitted into investment portfolios. Incidentally, here in Ghana, investments in digital
currencies such as Ripple XRP are rarely offered by institutional investors. Individual investors
who choose to invest in digital currencies usually do so on their own. However, for young
people who hope to see digital currencies supplant physical currencies, some institutional
investors in Europe, Asia and the United States have provided funds that hold select digital
currencies. To put the return profile of digital currencies in context, GHS 400 invested in
Bitcoin in 2010 would today provide an almost 16,000,000% return on investment,
outperforming any stock, bond, cash-convertible security or commodity. Another, Dogecoin,
would today have seen a close to 1,160% return on investment on a GHS 400 investment made
in January,2014, a month after it was initially offered.

That, however, does not necessarily mean that digital currencies are safe investment havens
for the individual investor : Ripple, another famous cryptocurrency would have returned a loss
of 26% on a GHS400 investment made in 2010.For the most part, cryptocurrencies are the
playgrounds of younger investors, who can afford to make bets on the direction
cryptocurrency prices are likely to take. Institutional investors have duly obliged by providing
digital currency funds.

Perhaps because of the recent (Corvid-19) pandemic, one of the lesser known alternative
institutional investments, catastrophe and pandemic bonds, has come to public knowledge.
While the name sounds off-putting, pandemic bonds have had some of the best returns of any
fixed income instrument. The structure of these bonds is relatively simple: an insurance
company issues a bond, which institutional investors subscribe to. The bond has triggers,
which are usually defined in the bond’s prospectus. The insurance company makes regular
interest payments on the face value of the bond to the institutional investors. The institutional
investor bundles several catastrophe and/or pandemic bonds, securitizes them and sells them
to everyday investors. When the pandemic or catastrophe bond is triggered, the institutional
investor and by extension the everyday investor loses its/her principal, which the insurance
company pays to those affected by the pandemic or catastrophe.

One such issuance of the pandemic bond was done by the World Bank in response to wildfire
infections such as Corvid-19. This issuance was a $425 million bond raised in 2017 mainly to

Electronic copy available at: https://ssrn.com/abstract=3644221

combat the West African Ebola infection and any ensuing epidemic. Institutional investors
subscribed to the bond and have received interest payments (actually, variable interest
payments) on the bond’s face value, providing for their individual investors a healthy return.
However, individual investors stand to lose their capital when the bond triggers and pays out
to affected countries. As is, the bond has not met all its triggers.

To make transition into retirement easy, companies and governments typically set up pension
schemes fed from employees’ incomes. The goal is that pension funds will provide good
returns on employees’ contributions. With that in mind, many pension funds find most of their
capital trickling to Hedge funds, Private equity and Venture Capital, institutional investors
who can provide outsized returns to pension funds and hence to those looking forward to
retirement.

Like digital currency focused funds, private equity and venture capital firms are hard to spot
in Ghana although they have some limited presence in Kenya, Nigeria and South Africa. Private
Equity firms and venture capital firms have similar goals but diverging approaches to reaching
these goals. Venture capitals will look to invest the capital from general partners(pension
funds, college endowments) into young companies, preferably at the seed stage, hoping to exit
either through an Initial Public Offering or by selling their stakes to later investors. Private
equity investors will typically look for undervalued companies, build financial models to
confirm their valuations, buy these companies and put in place a new management team that
they hope will improve operations and profits so they can sell the company off or list it on
public exchange .Of the three, hedge funds will have the most unorthodox investment
approach and will look to arbitrage opportunities, credit default swaps and even derivatives as
returns drivers. The downside to pension funds investing with hedge funds, private equity
and venture capital firms is the imprecise nature of their businesses; it's very common for
startups and existing businesses to fail and there is no indication that investment approaches
used by hedge funds will provide adequate returns.

Overall, like garden variety investments, alternative investments can provide a mix of bad to
great returns to an individual investor. They need to be carefully evaluated not only in terms
of upside and downside risk but also in terms of where the individual investor is in age and
career.

Electronic copy available at: https://ssrn.com/abstract=3644221