Table of Contents
Institutions and endowments have used exotic or alternative investment for decades. During the last boom years, more wealthy individuals and corporations added these instruments to get more diversification and earn hefty returns. The financial crisis of 2008 propelled alternative investments into the limelight.
In the aftermaths of the meltdown, many investors grew wary of these complicated investment strategies— collateralized debt obligations, auction-rate preferred securities and other instruments. Consequently, many companies have modified their investment guidelines regarding asset protection and preservation.
The new, more conservative investment approach has resulted in enterprises with large cash holdings, which flatten company earnings and corporate treasury portfolio performance. Corporate treasury departments face an array of challenges in their search for yields. These risks include credit, currency liquidity and interest rate. There is also the risks of operational and opportunity cost.
A extended low interest rate environment, market volatility, and out-performance by a particular asset class are all factors that can entice corporation to invest more of their assets into investments.
To balance the asymmetric risk inherent in current fixed income portfolios, many treasurers are under relentless pressure to consider the potential to earn higher returns potential in alternative fixed income or exotic corporate cash investments.
As treasurers assume more responsibilities beyond managing their company’s working capital, they have become more involve with senior management and directors in managing risk and enhancing profitability with more sophisticated asset allocation strategies, which include the following asset classes
These and other alternative investments attract investors for three reasons:
However, exotic corporate cash investments have different risks and characteristics compared to traditional investment instruments. They are less liquid —and even more so during stressful periods. The complexity and lack of transparency of many exotic investment strategies make them more susceptible to failure.
The appropriate allocation and use of exotic corporate cash investments has the potential to enhance the risk-return profile of the corporate investment portfolio. These investments offer distinctive advantages but also unique risks. It’s critical for corporate treasurers to be comfortable with exotic corporate cash investments when working them into their investment approach.