Alternative investments: five key themes
Alternative investments can be either traditional alternative investment vehicles, such as hedge funds, funds of hedge funds, private equity, private real estate and managed futures, or non-traditional products such as mutual funds investment and exchange-traded funds that also seek alternative-type exposure but have significant differences from traditional alternative investments. Alternative investments are often speculative and involve a high degree of risk. Investors could lose all or a substantial part of their investment. Alternative investments are only suitable for eligible long-term investors who are willing to forgo liquidity and put their capital at risk for an indefinite period. They may be highly illiquid and may employ leverage and other speculative practices which may increase volatility and risk of loss. Alternative investments generally have higher fees than traditional investments. Investors should carefully consider and consider potential risks before investing. Some of these risks may include, but are not limited to: loss of all or a substantial part of the investment due to leverage, short selling or other speculative practices; Lack of liquidity in the sense that there may not be a secondary market for a fund; Volatility of returns; Restrictions on transfer of interests in a fund; Potential lack of diversification and resulting higher risk due to concentration of trading authority when a single adviser is used; Lack of information regarding ratings and prices; Complex tax structures and delays in tax declarations; Less regulation and higher fees than mutual funds; and Risks associated with the manager’s operations, people and processes. In addition, opinions regarding alternative investments expressed herein may differ from opinions expressed by Morgan Stanley Wealth Management and/or other Morgan Stanley Wealth Management companies/affiliates.
Certain information contained in this document may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements. Clients should carefully consider a fund’s investment objectives, risks, charges and expenses before investing.
Alternative investments involve complex tax structures, tax-inefficient investments, and delays in the disclosure of material tax information. Individual funds have specific risks associated with their investment programs which vary from fund to fund. Clients should consult their own tax and legal advisors as Morgan Stanley Wealth Management does not provide tax or legal advice.
Interests in alternative investment products are offered pursuant to the terms of the applicable offering memorandum, are distributed by Morgan Stanley Smith Barney LLC and certain of its affiliates, and (1) are not FDIC insured, (2 ) are not deposits or other obligations of Morgan Stanley or any of its affiliates, (3) are not guaranteed by Morgan Stanley and its affiliates, and (4) involve investment risks, including a possible loss of capital. Morgan Stanley Smith Barney LLC is a registered broker and not a bank.
Hedge funds may involve a high degree of risk, often engage in leverage and other speculative investment practices which may increase the risk of investment loss, may be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in releasing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge fees high fees that can offset any trading profit and in many cases the underlying investments are not transparent and only known to the investment manager.
REITs invest the risks are similar to those associated with direct investments in real estate: fluctuations in property values, lack of liquidity, limited diversification and sensitivity to economic factors such as changes in interest rates and market downturns.
Options are not suitable for all investors. This commercial documentation must be accompanied or preceded by a copy of the brochure “Characteristics and risks of standardized options” (ODD). Investors should not enter into options transactions until they have read and understood the ODD. Before engaging in the purchase or sale of options, investors should understand the nature and extent of their rights and obligations and be aware of the risks involved, including, without limitation, the risks associated the business and financial condition of the issuer of the underlying security or instrument. Investing in options, like other forms of investing, involves tax considerations, transaction costs, and margin requirements that can significantly affect the profit and loss from buying and selling options. Options investment transaction costs consist primarily of commissions (which are imposed on opening, closing, exercising and disposing of transactions), but may also include margin and interest costs in transactions. particular. Transaction costs are particularly important in options strategies that require multiple purchases and sales of options, such as multi-legged strategies, including spreads, straddles, and collars. A link to the ODD is provided below: http://www.optionsclearing.com/about/publications/character-risks.jsp
Equity securities may fluctuate in response to news about companies, industries, market conditions and the general economic environment.
Obligations are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer the maturity of a bond, the more sensitive it is to this risk. Bonds may also be subject to purchase risk, ie the risk that the issuer will repay the debt at its option, in whole or in part, before the scheduled maturity date. The market value of debt securities may fluctuate and the proceeds from sales prior to maturity may be more or less than the amount originally invested or the value at maturity due to changes in market conditions or the quality of issuer credit. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer may not be able to make timely payments of interest and/or principal. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments on a given investment will be reinvested at a lower rate of interest.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including higher credit risk and secondary market price volatility. Before investing in high yield bonds, investors should be sure to consider these risks alongside their personal circumstances, objectives and risk tolerance. High yield bonds should only represent a limited part of a balanced portfolio.
The initial interest rate on a floating rate note may be lower than that of a fixed rate security of the same maturity because investors expect to receive additional income from future increases in the floating security’s underlying benchmark rate. The reference rate can be an index or an interest rate. However, there can be no assurance that the Reference Rate will increase. Certain floating rate securities may be subject to redemption risk. Many floating rate securities specify minimum (floors) and maximum (caps) rates. Floats are not protected against interest rate risk. In an environment of falling interest rates, floats will not appreciate as much as fixed rate bonds. A decline in the applicable reference rate will result in a decline in the interest payment, which will negatively affect the regular float income stream.
Yields are subject to change with economic conditions. Yield is just one of the factors to consider when making an investment decision.
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio will be to changes in interest rates. Generally, if interest rates rise, bond prices fall and vice versa. Longer-term bonds have a longer or higher duration than shorter-term bonds; as such, they would be affected by the change in interest rates for a longer period if interest rates were to rise. Therefore, the price of a long-term bond would drop significantly relative to the price of a short-term bond.
Due to their narrow focus, sector investments tend to be more volatile than investments that diversify across many industries and companies. Risks applicable to companies in the energy and natural resources include commodity price risk, supply and demand risk, depletion risk and exploration risk. Health Sector Actions are subject to government regulation, as well as government approval of products and services, which can have a significant impact on price and availability, and which can also be significantly affected by rapid obsolescence and expiration patents.
Asset allocation and diversification do not assure a profit or protect against losses in declining financial markets.
Rebalancing does not protect against a loss in the event of a decline in the financial markets. There may be potential tax implications with a rebalancing strategy. Investors should consult their tax advisor before implementing such a strategy.
© 2022 Morgan Stanley Smith Barney LLC, Member SIPC.