Alternative Investments

Most conversations on “alts” center around four types of alternative investments: real assets (natural resources, infrastructure, intellectual property), hedge funds (including managed futures), private equity (including mezzanine and distressed debt), and structured products (including credit derivatives). It should be noted that this creates a focus on institutional-quality investments.

For the purpose of creating a truly diversified investment portfolio, one should also include illiquid assets such as artwork and collectibles.

Study Objectives

  1. Define alternative investments
  2. Assess comic books as investments
  3. Explore portfolio construction with alternative investments

Alternative Investments

There are four generally accepted types of alternative investments:

  1. Real Assets
  2. Hedge Funds
  3. Private Equity
  4. Structured Products

Real Assets

Real assets include natural resources, infrastructure, and intellectual property. Some consider real estate and mortgages as real assets. This is incorrect. These are income producing assets, and correlation is more important than a philosophical conversation on what “real” is. Therefore, real estate and mortgages should be considered as “income” investments. Yes, the home you live in can be considered for your fixed income “bucket”, but only in the amount of equity you own in this asset.

Hedge Funds

“Hedge fund” is a large grouping within the alternative investment asset class with many diverse strategies and its own unique set of legal considerations. By definition, a hedge fund is a private investment limited partnership that uses a broad range of financial instruments such as short selling, derivatives, leverage, and/or arbitrage on a variety of markets. Funds are structured such that they require high minimum investments, have limited access, cater to high-net worth individuals, and managers are paid performance-based commissions.

Beware of the hedge fund weaknesses before venturing far into these financial products.

Hedge fund weaknesses include high attrition rate, lack of information, limited liquidity, high fees, and certain legal constraints. This author has found the high attrition rate of hedge funds to be particularly frustrating. In fact, data shows that any given fund has an approximately 7% chance of disappearing during its first year of existence, 20% over its first two years, and 60% within five years of launch.

Hedge funds are typically classified by their investment strategies. As there are many strategies and even sub-strategies that can be discussed, this author will take a top level approach and consider directional versus non-directional strategies and finally, fund of funds.

  1. Directional Hedge Fund Strategies
  2. Non-Directional Hedge-Fund Strategies
  3. Fund of Funds

Private Equity

In a nutshell, private equity is the providing of capital investment and/or working capital for the purpose of helping private companies grow. Private equity investing is considered a high-risk, high-reward venture. There are two primary types of private equity investments: equity types of private equity and debt types of private equity. “Equity” private equity includes venture capital, buyouts, and leveraged buyouts, amongst others. “Debt” private equity includes mezzanine and distressed debt.

Venture Capital: early-stage financing for startups

Buyouts: transactions that generate privately owned claims on equity or equity-like investments.

Mezzanine Debt: debt that is inserted into a company’s capital structure

Distressed Debt: either an issuer in trouble, or a debt instrument in trouble

Structured Products

These financial instruments are created to exhibit a particular risk, correlation, or other attribute. Financial structuring enables various investors to hold claims with different risk exposures on the same underlying assets. The idea is to divvy up the claims to an asset, allowing investors to pick their risk and taxation levels. From an economist’s perspective, the role of structured products is “market completion” (a market meeting the needs and preferences of all participants).

The motivation behind investing in structured products is clear: risk management and return enhancement. Structured products include credit derivatives, CDOs (Collateralized Debt Obligations), CMOs (Collateralized Mortgage Obligations), and equity-linked instruments.

“In the context of alternative investments, financial institutions strive to meet the preferences of various investors by creating securities or products that move the market toward being more complete. Major banks, insurance companies, and other financial institutions offer structured products that are tailored to the needs of the individuals and institutions for risk management or risk enhancement purposes.” – Alternative Investments CAIA Level 1, Wiley, 2012

Other Illiquid Assets

Other illiquid assets include artwork, jewelry, gemstones, and collectibles such as stamps, Magic the Gathering cards, ancient coins, and comic books.  Data shows that jewelry and gemstones are not good long-term investments. Artwork requires curation. Of the above, collectibles are interesting for both historical and sentimental value, above and beyond the value of the asset.

Building a Comic Book Portfolio

Alternative investments for many investors are considered out of range, in terms of income and financial holdings. However, there are illiquid alternative investments with decent levels of capital gains available to the average investor … including collectibles such as coins and comics. 

Comic books as an investment are worth reviewing for a variety of reasons. Comic books can be rated by a third party, such as CGC, so that value can be fairly determined without physically viewing the investment before purchasing. Comic books also have vibrant and active marketplaces on Amazon.com, Ebay, and several auction sites. So, despite being considered an illiquid asset, comic books can actually be sold quite easily, assuming the investor has collected an in-demand, key asset.

Fortunately, comic books follow a fairly predictable collectibles hype-cycle of 30 years. Plus, a final reason to consider comic books for investment is Marvel’s huge success since its purchase by Disney. Superheroes are more popular than ever, Disney has executed on the Infinity Gem storyline flawlessly, and Marvel’s success does not seem to be ending anytime soon.

Comic Book Investment Sectors

Comic books are organized into different “ages” based on when they were published. The major eras are the Golden Age, Silver Age, Bronze Age and Modern Age. That said, the history of comics is slightly more complicated than the above four eras, with comics coming before the Golden Age and the Modern Age now segmented by collectors into several sub-ages. The problem is there aren’t very many hard rules when it comes to determining comic eras.

To aid in one’s understanding of the development of comics through time, consider the following:

Era of Comic Strips

  • 1500-1650 – Pioneer age
  • 1650-1800 – Victorian age
  • 1800-1938 – Platinum age (first appearances include Popeye, Felix the Cat, Tarzan, and Buck Rogers)

Era of Comic Books: Officially recognized

  • 1938-1950 – Golden age (starts with appearance of Superman, the 1st superhero)
  • 1950-1970 – Silver age (starts with the adoption of the Comics’ Code)
  • 1970-1985 – Bronze age (starts with the abandonment of the Comics’ Code)

The Modern Age: Unofficial Sub-Categories

  • 1985-1998 – Copper age (“the Dark Age” – starts with the Watchmen and The Dark Knight Returns)
  • 1998-2010 – Dynamique age (also known as the Millenium age, rise of Image Comics)
  • 2010-Now – New age (also known as the Diamond age, represents an age when comics again become popular)

Some Final Tips

Do yourself a favor and only purchase graded comics (CGC is the most popular and highly reputed grading service, but others such as PGX are acceptable and sometimes result in better pricing). Next, never pay extra for signatures. The only signature of value is Stan Lee’s, and even at that it adds no more than $100 on average to key comic value. Finally, go for quality not quantity. Get the best quality comics you can, but avoid 9.9s. These do not result in additional value in a quick sale to large comic stores. Never buy 10’s or variant covers.

In particular, this author focuses on comics at 8.5 to 9.4 and first appearances of superheroes, as his experience has determined that these have the best liquidity. 9.8s should be considered for Copper and Modern Age comics, as there are more slabbed and in production than in the Silver Age, for example.

Portfolio Construction

One thought this author has is to focus on female anti-hero characters. Perhaps the popularity of anti-heroes characters such as Wolverine, Punisher, Cable, Spawn, Ghost Rider, Venom, Constantine, Blade, the Hulk, Magneto, Gambit, Moon Knight, Batman, Namor, and Deadpool will be found in female anti-hero characters such as Rogue, Psylocke, Black Widow, Magik, Rogue, Kitty Pryde, Emma Frost, X-23, Domino, Gamora, Scarlet Witch, Mystique, Witchblade, Elektra, Batgirl, and Harley Quinn.

Only time will tell, but one can definitely see good volume and demand right now on the first appearances of the above female anti-heroes in comics.

Were one to follow the Disney trend towards strong female superheroes, a Female Anti-Heroes Portfolio would be worth consideration. And, it is worth noting that many popular female anti-heroes come from the X-Men universe, the rights to which Disney recently purchased. As mentioned earlier, this author is expecting a surge in the prices of X-Men keys over the coming years. A female anti-hero comic book portfolio may look similar to the sample below, with investments from multiple comic book ages.

Get the book What is Investment Diversification? to learn which comics were selected and why.

So, What’s the Point?

Obviously, we haven’t discussed a diversified alternative investment portfolio in this section. Rather, we’ve discussed holding a few key comics for capital gains waaaaay down the road, following the 20- to 30-year hype cycle described earlier.

Remember the permanent portfolio? The lesson learned was that it is more important to diversify across assets classes than in an asset class, when the goal is risk management, minimized drawdown, capital preservation, and stable returns. Therefore, it is valuable to hold fewer, more valuable comics than it is to hold many, less desirable comics. This is the case especially in terms of liquidity.

Terminology

Arbitrage
The simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

Buyouts
Transactions that generate privately owned claims on equity or equity-like investments. Buyouts are similar to mergers, but distinguished by the extent to which the purchased company is considered as a stand-alone business or is intended to be integrated into the purchasing company.

Distressed Debt
Either an issuer in trouble, or a debt instrument in trouble. In the case where an issuer is in trouble, these are at-risk businesses that may have defaulted on their debt or may even seeking bankruptcy protection.

Fund of Funds (FoF)
Investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. Also FoF.

Hedge Fund
A private investment limited partnership that uses a broad range of financial instruments such as short selling, derivatives, leverage, and/or arbitrage on a variety of markets

Mezzanine Debt
Debt that is inserted into a company’s capital structure between the floor of equity and the ceiling of senior secured debt.

Private Equity
The providing of capital investment and/or working capital for the purpose of helping private companies grow. Private equity investing is considered a high-risk, high-reward venture.

Structured Products
Financial instruments created to exhibit a particular risk, correlation, or other attribute. Financial structuring enables various investors to hold claims with different risk exposures on the same underlying assets.

Venture Capital
Early-stage financing for startups without the track record to qualify for investment from traditional markets or capital from large lending institutions.

Sources

  1. The Complete Guide To Hedge Funds & Hedge Fund Strategies, palgrave macmillan, 2013, by Daniel Capocci
  2. Alternative Investments – CAIA Level 1, Wiley, 2012, by Donald Chambers, et all
  3. The Value Of Money – Sovereignty In The Ancient Era  https://briandcolwell.com/2019/03/the-value-of-money-sovereignty-in-the-ancient-era/.html
  4. CGC Grading Scale  https://www.cgccomics.com/comic-grading/grading-scale/