Alternative Investments – What, Who and Why

What Are Alternative Investments?As stock markets continue to falter across the globe, worries of a default on sovereign debt in Europe continue to mount, and inflation continues to erode the real value of savings, investors are considering alternatives to traditional assets such as stocks, bonds and cash. But just what are alternative investments, who is investing in them, and what are the risks involved?Traditional InvestmentsTraditional investments are considered to be equities (shares), cash, bonds and property. Most investment portfolios are made up of a combination of these kind of assets, and financial advisors are trained to advise investors on the relevance of these kind of investments based upon their own specific set of circumstances. Investors have long invested in stocks for growth and income, bonds for income, and cash of income in the hope of building their wealth faster than the rate of inflation in order to provide for retirement or other life events such as school fees or maybe a house move.Alternative InvestmentsAn alternative investment can be any transaction entered into with the ultimate aim of generating capital growth in the value of the underlying asset, or regular income, that is not a traditional investment asset as detailed in the section above.These kinds of assets have been very popular with institutional investors who want to diversify their portfolios and capture profit that is generated outside of the traditional markets. Some examples of investment alternatives are precious metals such as gold, art, fine wine, collectibles, farmland and forestry investments.Alternative investments behave differently to traditional assets because capital growth is usually derived from an increasing demand and a finite supply, such is the case with gold, farmland, fine wine and art. The greater the demand, the higher the price and more profit for the investor. Income from alternative investments is not usually in the form of a dividend as with shares, but can be rental income from a property, or the sale of commodities produced by the asset such as crops from farmland or timber from forestry. This makes alternative investments popular because neither income nor capital growth is dependent upon the performance of stock markets or other traditional markets forces. This means that investors can turn profits, even in a downturn market.Who is Investing in AlternativesLarge investors such as pension funds, hedge funds, family offices and high net worth individuals have been investing in alternatives for many years, in many cases generating excellent returns beating traditional markets by some margin. These investors are experts and understand the assets they are buying and how to value, manage and ultimately dispose of them effectively and profitably. Investing in art, for example, requires an extremely high level of expertise and knowledge to invest successfully.Recently, institutional investors have started to buy more and more farmland and forests, as demand for all of commodities that farmland produces on annual basis such as food, animal feed and fuel, is growing in line with our expanding population. We simply require more and more of these commodities each year but we have very little farmland left that isn’t already in production. It is this increasing demand and limited supply that pushes up prices in the long-term, and the same can be said for forestry investment’s as humankind requires more and more timber to build and maintain our homes and cities, yet there is very little natural forest left to harvest so we must rely of commercially grown timber which takes many years to mature. Again, increasing demand and limited supply push up prices, creating profit for the owners of the assets.Many analysts reporting on alternative investments such as Barclays Capital have indicated that by 2015, almost 5%, or $1 trillion in institutional investment capital will be invested in farmland and associated commodities.

Choice Of Law In Syndicated Loans And Bonds

INTRODUCTION:Any relationship between two entities, either persons or institutions, cannot be established except in accordance with some set of rules. These rules may be unenforceable norms or customs of a group or society, or some explicit laws having a binding and enforceable authority. A contract is a formal structure of a relationship between two or more parties, binding them together into a contractual relationship; and imposing upon them certain obligations and granting them certain rights over each other. In case of any problem with these obligations or rights, law of the land would come into action. But if the contracting parties belong to different lands, then there would arise a question as to law of which land should come into force. If the contracting parties have no earlier consensus over this issue, then it is more likely that the problem would remain unresolved; and one or more parties would suffer the loss. Hence, the need to decide at the time of making contract, as to which law would be followed.CHOICE OF LAW IN SYNDICATED LOANS AND BONDS:Similar is the case of the financial contract. ‘Every legal issue under a financial contract must be determined in accordance with a system of law. An aspect of a contract cannot exist in a legal vacuum.’(1) Syndicated loans and bonds are mostly international in their character. They usually involve borrowers and lenders from various countries; and ‘the greater the number of countries involved the greater the number of municipal systems of law which have to be considered.’(2) As there is not single set of International laws that could effectively govern the syndicated loans and bonds, it is necessary for the parties to these contracts to choose an agreed system of law.A syndicated loan agreement normally is contracted between the highly sophisticated institutions like banks, corporations, state corporations, and even the sovereign states themselves. It involves a number of systems of law (even a single bank operating internationally can be subject to different systems of law)(3). The international bond issues, too, involve issuers and investment banks from different countries. In some respects, international bonds (Eurobonds) are even more ‘international’ than the syndicated loans, as they are sold to the public at large, and the individuals and other entities buy and sell them in numerous jurisdictions. During this course of business a number of transactions involving numerous legal documents take place. With these transactions rights and liabilities shift from one entity to another very frequently. When it happens in different systems of law, it creates ambiguity about which law should apply in which case. This ambiguity makes the business vulnerable to unpredictable situations. Eventually the whole business market suffers serious damage.”In order to reduce such uncertainty to a minimum, an attempt is made in practice to apply one system of law to the transaction and to exclude as far as possible the applicability of other systems of law with which the transaction may have some connection. This is generally sought to be achieved in practice by a ‘choice of law’ clause which subjects to one governing system of law _ ‘the proper law’ _ the validity, enforceability and interpretation of the contractual and other legal documents which constitute the transaction.”(4)The practicality provides the opportunity to the lender to have preference in ‘choice of law’, as in case of a dispute, it is his money that would need to be recovered. In case of the Euro bonds, where an investment bank helps in selling securities(5), the situation becomes different, as the lenders appear on scene after the bond is issued under certain terms including the matter of choice of law. In any case, while exercising the choice, it is preferred that such system is chosen that is familiar to the parties, so that the tendency of using certain type of financial transactions needs not to be changed. Further, the dealing with legal as well as business issues could be convenient. It is also important that the system chosen is greatly mature and the relevant jurisdiction enjoys good reputation for its impartiality. Political stability in that specific jurisdiction and convenience of language are also important factors in choosing a certain system of law(6). The incident of freezing of foreign currency accounts following imposition of emergency after the atomic tests in 1998(7), the stock market suffered such a huge loss that it took years to recover. In such a situation no serious financial activity can grow without fear of the unseen. While the enforcing forum is not less important a factor; the most significant factor of having the choice of law clause is the “insulation of the loan contract from legal changes in the borrower’s country.”(8)While outlining the contract some of the essential documents would be prepared; for example, in case of a bond issue, the subscription agreement, the trust deed, the agreement between managers, the selling group agreement and the bond instruments themselves, and in case of the syndicated loan, the loan agreement. All of these legal documents would require validity, enforceability and when needed interpretation.(9) This could only be done under an agreed system of law.Determination of rights and liabilities and interpretation of the legal documents would involve a number of laws relevant to the different issue. These may include the securities law, principles of contract, interpretation of contracts law, insolvency law, negotiable instruments law, and the like. All these laws should relate to one system of law, so as to make their interpretation and implementation possible.(10)There are more than 310 jurisdictions in the world, which are grouped into nine classes i.e. Traditional English, American Common Law, Mixed Roman/common law, Germanic and Scandinavian, Mixed Franco-Latin/Germanic, Traditional Franco-Latin, Emerging Jurisdictions, Islamic Jurisdictions and Unallocated Jurisdictions(11). These categories are further combined into three major types: Common Law, Napoleonic and Roman-Germanic jurisdictions.(12) This much number of jurisdictions naturally has a potential to create problems in case of international syndicated loans and bonds where different systems of law would be involved. So, it becomes imperative to have ‘choice of law’ clause in the legal documents.CONCLUSION:The term international, in the syndicated loans and bonds, entails multiple laws, forums and jurisdictions. The conflict of laws, in such a case, is natural. Combination of laws, given their different approaches, is not a workable proposition. Harmonization of financial laws at international level is still an idealistic suggestion. So, to form, interpret and execute the international contracts, there is a need to adopt a single system of law. This, the parties to a contract can choose at the time of the concluding of the contract. This is done to ensure the validity, enforceability and interpretation of all the legal documents relevant to the contracts of syndicated loans and bonds. It helps eliminate the uncertainty and unpredictability of the fate of a contract. Most ideally, it is an external law, having a potential to insulate the loan contract from legal changes, especially, in the borrower’s country. English law worthy of playing such a role. There is another advantage of choosing it: it doesn’t demand any connection of the lender or borrower with England.The fundamental importance of the inclusion of ‘choice of law clause’ in the international syndicated loan agreements and the legal instruments of the bonds, is to get rid of the uncertainty concerning the expectations about the contract, by providing a workable legal mechanism to resolve all the legal issues which would arise from time to time.REFERENCES:1). Wood, P R (1995) International Loans, Bonds and Securities Regulation; London: Sweet & Maxwell P-612). Slater R (1982) “Syndicated Bank Loans” presented to the Conference on ‘The Transnational Law of International Commercial Transactions’ at Bielefeld, W. Germany, October 5-7, 1981, in the Journal of Business Law pp 173-1993). Cranston R (2003) Principles of Banking Law; 2nd Ed. Oxford: Oxford University Press; p 4384). Tennekoon R (1991) The Law and Regulation of International Finance; London: Butterworths; p 165). Mishkin F (1992) The Economics of Money, Banking, and Financial Markets; 3rd Ed. New York: HarperCollins Publishers; p 2866). Paul C & Montagu G (2003) Banking and Capital Markets Companion; 3rd Ed. London: Cavendish Publishing; p 947)., at visited on 14-05-2005
8). Wood P R (1995) International Loans, Bonds and Securities Regulation; op cit9). Tennekoon R.. op cit10). Slater R (1982) op cit11). Wood P R (1997) Maps of World Financial Law; London: Allen & Overy; p 912). Wood, P R (2005) Oxford and Cambridge Introductory Lectures of Financial Law, op cit

Personal Financial Planning After The Global Financial Crisis

The global financial crisis (GFC) made a lot of people question their personal financial planning strategies. This always happens after a downturn or severe market correction. The fact that the GFC was the biggest market downturn in about 70 years and the whole world was affected caused more fear and worry than usual. In addition to that, the global markets have been slow to recover. It is understandable that many people would be wondering if it they should hang on to their original strategy or should they look for alternatives.Is your strategy sound?If a financial planner, as part of a comprehensive financial plan, recommended your investment strategy, then your strategy should be sound. The recommendations would have been made after he or she completed a fact find about your situation. This would have taken into account your investment time horizon and you investor profile. Your investor profile is determined by a series of questions to find out your tolerance to investment risk. Investment risk, in this case, means short term fluctuations in the market. The recommended investment portfolio would have reflected your risk tolerance by limiting your exposure to growth assets – shares and property – whose values do fluctuate with market movements.How Long Should You Stick with an investment strategy?You should stay with the original strategy for the length of the plan. If you have a ten-year plan then you stay with that. There is no doubt, staying with an investment strategy for the medium to long-term works best. The other alternative is to try to pick the market. In other words, when the market looks like going down, you move into a safe investment until the market starts to move up. The trouble is most people get the timing wrong – by the time the market has dropped, they are usually too late and the same applies when it goes up. Even the professionals have trouble picking the market. How many picked the global financial crisis?Tough out the Tough timesThe hardest part is to have faith in your original financial planning strategy when the market is moving against you. It is well to remember that is the nature of financial markets. Both the share market and the property markets have around 5 – 7 year cycles. If you look at their history over the long-term they both make money. That is why your strategy would have been designed for a particular time frame, so that your portfolio could ride out those downturns. Generally, the only people who lose during market downturns are the ones who panic, sell the investments at a loss and put the money into a safe place. They are unlikely ever to get their money back.If you have had good advice or if you did it yourself after much research and planning, you should stick with your original personal financial planning strategy and allow the growth assets in your portfolio time to grow.