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.
- Define alternative investments
- Assess comic books as investments
- Explore portfolio construction with alternative investments
There are four generally accepted types of alternative investments:
- Real Assets
- Hedge Funds
- Private Equity
- Structured Products
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 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.
- Directional Hedge Fund Strategies
- Non-Directional Hedge-Fund Strategies
- Fund of Funds
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
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 kn