One of the most important things to know about Ultra HNW Investors is that they have heavy alternative asset allocations. Ultra high net worth investing has so much capital in the realm of the alternative asset that they can use that capital to pick and choose which investments will perform well and which will not. The more capital you have to work with, the more potential for finding opportunities and the better the chances of winning investments. If you do not have as much capital to work with, it becomes more difficult for you to find opportunities to cost more money.
Ultra HNW Investors Have Heavy Alternative Asset Allocations
One of the biggest things that a heavy investor needs to do is create a portfolio balance. Portfolio balance refers to spending an equal percentage of your total investments into each of your secondary investments. In the investment world, creating a portfolio balance is very important. If one investment performs poorly and another performs extremely well, you will likely lose money in both investments. Suppose you have a heavy concentration of cash in one or two areas. In that case, that portfolio balance will need to be adjusted to reduce the risk of those particular investments failing while your other investments are performing very strongly.
There are many different investment strategies that you can use to create a balanced portfolio. Many professionals recommend that you utilize the buy-and-hold investment strategy. With this strategy, you invest your money into every type of investment that you feel could make money, and you have the capital to handle that investment if it takes a turn for the worse. Many heavy hitters like Ultra HNW Investors have utilized this investment strategy to great success and created huge returns for themselves and their clients.
Ultra HNW Investors Have Smaller Fixed Income Allocations
Ultra HNW investors typically have very large, multiple, and possibly multi-million dollar investments. They generally have access to the biggest, most respected companies in their sector. That is not the case for many SME’s (small to mid-sized) who are seeking capital. They typically need to do business with banks for loans or credit lines and cannot secure the same level of interest because they are so unlike the mega-rich investors. Here are some of the reasons why.
Banks frown on lending money to SME’s for one simple reason. It is more difficult to collect the loan in the first place from a “high risk” customer. The banks have made loans to many businesses over the years. However, they make those loans with the guarantee that the loan will be paid back. When those businesses fail to pay back those loans, the banks lose their investment; they have no other choice than to pass on the interest rate.
To get the best rate possible, the best way to approach SMEs is as an ultra high-risk investment. These investments tend to have very high interests and can be quite difficult to come by. However, if you have the proper negotiating skills and know what you are looking for, you can find some great deals.
There Is Value in the Illiquidity Premium, Ultra High Net Worth Individuals Believe That
Ultra-high net worth believes in modern financial theories. Many things are explained with what is called a “liquidity premium.” What is Liquidity, Premium? It is the reason behind a difference in identical financial instruments’ purchase prices, which have all the same characteristics except for liquidity. It is a small segment of a three-step theory that seeks to describe the behavioral response of interest curves to different interest rate changes.
According to this theory, the more liquid a financial instrument is, the lower the liquidity premium will be on that instrument. Therefore, a bond with a longer duration will have a lower illiquidity premium than, say, a bond that’s five or ten years old. Binding, Salmon, and Sands first explained this concept in their paper “On the Economic Analysis of Liquidity Premium.” The standard deviation of the price portfolio of an interest rate will help determine how much of this premium would be charged to a bond with varying maturities.
If a bond is rated high and the market perception of that bond is high, then the illiquidity premium will be calculated to be a higher amount. On the other hand, if the perceived value is low, then the bond will have a lower liquidity premium. In the end, the calculation results in a percentage that essentially sums up the difference between the actual purchase price of the security and the amount of liquidity premium that bond buyers will pay. When dealing with bonds, it is important to understand what is Liquidity Premium and how to interpret it. By knowing the definition, you can eliminate risk when dealing with these types of securities.