Alternative Investments - good strategy?

[Viki2010]

Hi, I've seen in a few places in various solutions "Alternative Investments" coming up....for example infrastructure.
1. Is that a generally safe asset class?
2. What type of products is it suitable for backing up?

There seems to be a trade of between an interest rate risk and spread risk. For example, we can make annuity products more profitable by investing in corporate bonds or alternative investments, helping the capital position, solvency of the company but at the same time we are increasing a spread risk as corporate bonds have a higher spread risk than government bonds. I am not sure how the alternative investments stand in terms of the spread risk.

 

[Lindsay Smitherman]

Infrastructure investments (eg roads, bridges, railways, pipelines, schools, hospitals etc) can be more or less risky than a corporate bond. It depends on the specific nature of the investment, whether there are any government guarantees provided and so on (and of course the inherent riskiness of whatever corporate bond it is being compared against).

You may be confusing interest rate risk and spread risk (see separate thread). If structured as a fixed interest security, the level of interest rate risk would be broadly the same as for a standard bond security of the same duration. However, the spread risk will differ depending on the inherent liquidity and default risks.

Such investments can be used to back any type of business. Their characteristics depend on how the infrastructure investment is structured: it could be like a fixed interest security, index-linked security, property or even equity. Annuity portfolios are a good example, particularly where the arrangement is bond-like in nature, because the extra yield helps to support better annuity rates (or higher profits).