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The Central New York Business Joumal

August 3, 2007

Alternative investments offer new options for investors

Loss of all, or a substantial portion, t wasn't all that long ago that aver- of your investment age investors only had stocks, due to short-selling, bonds, and mutual fluids as their only leveraging, and other investment altematives. The past several speculative investment years, the invest- practices Lack VIEWPOINT "^^ universe has secondaryof liquidity or ^" ' market opened up and a Place Lack of reporting new heading called due on valuations and "alternative investments," which have hispricing torically only been avaiiabie to an elite Less regulation few, have now become available to nearly High account minimums eveiyone. Let's take a look at each area to see how What are altemative investments? It's easier to explain what they are not, rather investors are utilizing each of these investthat what they are. They are not your typi- ments. Non-traded REITS: This asset class cal stocks and bonds. Alternative investhas gained tremendous traction over the ments can include non-traded real-estate investment trusts (REITS), private equity, past five years and investors have flocked limited partnerships, long/short funds, to real estate. A REIT allows an investor to purchase a pool of real-estate assets in one hedge funds, and managed futures. There are certain attributes that these professionally managed portfolio. Investors altcmative investments contain that can purchase the non-traded REiT at a set price, make them extremely attractive as a por- generaHy $ 10/share and receive a dividend either monthly or quarterly. Current yields tion ofa fully diversified portfolio. are in the 6 percent to 7 percent annualized Pros range and share prices do not fluctuate. Low correlation to other holdings The share price is merely an estimate of the Exposure to institutional money-manportfolio value, and these investments do agement techniques lack liquidity. The goal of most non-traded Income generation can be attractive REITS is to eventually sell the portfolio or Investment performance can potentially list the shares. Prior to that, the shares may exceed that of traditional investments lack a secondary market and shares may Cons Investment-management expenses can not be transferable. These REITS need to be clearly understood, but in a proper be high portfolio can be attractive as real estate " Volatility of returns By Bryan M. Place

offers attractive diversification benefits for many portfolios, A pmdcnt allocation decision is to have no greater than 3 percent to 5 percent of total investment assets in this asset class. Hedge funds: This is certainly the most popular find exciting investment in the altemative-investment universe, mostly because of the perceived exclusivity. Hedge funds have historically been reserved for the high-net-worth market place, as investment minimums often exceed $1 million. This has recently changed, and a number of funds have begun to sprout up and account minimums can be as low as $25,000. Hedge funds are loosely regulated private-investment funds that, unlike mutual funds, have the ability to attempt to capture gains by being both long and short in the market as well as in any style, sector, or market cap. Funds can oflen have high fees of I percent to 2 percent, along with performance bonuses equal to 20 percent of profit. The funds of^en employ leverage, which can amplify both gains and losses. Losses can also be catastrophic as seen in Marin Capital Partners LP and Long Term Capital Management, two recent hedge funds that failed. Hedge fluids are appropriate for diversification purposes, but investors should avoid employing a large percentage of their investments to any one strategy. Private equity: This has recently become the investment du jour as private-equity assets have risen, and substantial buy-outs of well-known publicly traded companies

have taken place. Private equity is simply a group of investors that pt>ol capital and manage private enterprises or take existing public companies private. Recent privateequity acquisitions include HCA, Hertz, Toy-R-Us. Chrysler, and Neiman Marcus. This all sounds attractive and exciting, but gaining exposure to private equity is still somewhat exclusive and the big players such as Bain Capital, Blackslonc Group, and KKR have substantial minimums that make this an unattainable investment alternative for most investors. Pros Potential to serve as a high-risk, highreturn investment Lack of correlation to stocks and bonds Cons High minimums Uncertain returns Risk and portfolio considerations Potential for diminishing returns Limited partnerships (LPs): This is a somewhat broad heading, but I want to specifically focus on LPs that offer tremendous tax savings as an incentive to invest. This includes oil and gas, low-income housing, and lease LPs. New partnerships are coming to market daily, and their marketing material and sales pitch is nothing short of impressive. When looking under the hotxi. however, the returns may not support the pilch. These LPs can generally have very high upfront and ongoing fees.

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The Central New York Business Joumal

August 3, 2007

Continued from page 6

The key to looking at any altemative investment is to understand the four major aspects
chance. Managed futures are most easily accessed through a niulti-manager platform where the managers employ a technical trading platform and have access to a number of futures markets. These maritets can include metals, stock indices, currencies, agricultural commodities, and energy. Futures can be an attractive allocation decision in a fully diversified portfolio because they aetually have a negative correlation to stocks. However, as with previous altemative investments discussed, track record, fees, and liquidity are important aspects of any program, and futures should probably not exceed 3 percent to 5 percent ofa fully diversified portfolio. Traditional investments with an alternative twist: There are several mutual-fund companies that now offer funds tliat are both long and short in the market, including funds utilizing leverage, which can amplify gains as well as loses. The use of leverage and short selling are especially risky strategies as short-selling (betting a stock or sector will tall in value) losses could potentially be unlimited, because stocks can rise forever and compound losses. The use of these strategies should only be employed by the sawiest of investors and should only be utilized as a hedging strategy. The altemative-investment universe is certainly vast, and for the most part, still exclusive, but as you can see. the barriers are beginning to fall. The key with any investor looking at these alternative investments is to understand four major aspects: 1) How does the fee structure work? 2) What are the investment's liquidity characteristics? 3) What are the investment's risks and volatility? 4) How does it fit into my portfolio? If those questions can be answered to your satisfaction, then perhaps the investment is appropriate for your portfolio. With any investment, these positions do require follow-up and ongoing due diligence; unlike the popular infomercial you can't just "set it and forget it." Bryan M. Place. CFP. w the president of Place Financial Aih'isors (}. a fee-based financial-planning and asset-management firm based in Maniius.

laek a seeondary market (ability to sell to other investors if needed), and therefore lack liquidity. The oil and gas LPs have had a tremendous run with the high price of oil. Tliese partnerships can offer attractive returns, especially when accounting for the tax benefits. There are a number of players in this space, and investors are best served to stick with those with an established track record. Managed futures: Have you always wanted to miike money in orange-juice ftitures or pork bellies? Well here's your

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Job-search time falls in second quarter

By Journal Staff ob seekers can expect to spend less time searching and more time working, according to the Challenger Job Market Index conducted by International outplacement consuhing firm Challenger, Gray & Christmas. Inc. Individuals seeking work landed jobs 17 percent faster between April and June, than in the first quarter of 2007. The search time for job seekers 50 or older decreased dramatically, dropping almost 32 percent in the second quarter, according to the Index, a quarterly survey eomprised of the responses of 3,000 job seekers across the nation. During the second quarter, the average search time before winning a job was 3 months, dov 0.6 months from the preceding quarter. For job seekers 50 and older, the search time decreased from 4.5 months to 3.1 months. CEO of Chicago-based Challenger, Gray & Christmas. John A. Challenger, says, "Skilled workers of any age are in demand right now, but the ones in the highest demand are those who can hit the ground running with little or no training and begin contributing immediately to the bottom line. Individuals wilh 20 to 30 years of experience under their belts are obviously in the best position to do this." According to the federal Bureau of Labor Statistics, there is an obvious demand increase for older workers with more experience. From June 2005 to June 2007, employment for workers 50 lo 54 increased by almost 1 million, and for workers 55 to 64, it climbed nearly 1.7 million, Although job seekers are experiencing a decrease in job-search time, there does not seem to be a decline in job quality, according to the survey. More than 90 percent (92.5) of respondents reported acquiring job positions that were either of equal or better quality, up neariy 2 percent from the previous quarter, according lo the Index.

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