A Look Into Alternative Investments

June 7th, 2021 by dayat No comments »

Your investment portfolio will typically include conventional investments such as stocks and bonds both equally important parts of a solid, long-term investment strategy. But, there are many other less-typical investments that can supplement your portfolio and provide you with opportunities to reduce some of the effects of market fluctuations. Consider alternative investments such as commodities, hedge funds, mutual funds with alternative strategies, and futures to round off your portfolio.

What are alternative investments?
Alternative investments are asset classes that generally don’t move together with traditional equity and fixed income markets. They usually follow their own cycles. As a result, alternative asset classes have a low correlation with standard asset classes; therefore they may help diversify your portfolio by reducing the overall volatility of the portfolio when traditional asset classes such as stocks and bonds are performing poorly.

Historically, alternative investments have been restricted to high-net worth individuals and institutional investors, but these days they are far more available to a wider audience. Alternative investments range from real estate to hedge funds to commodities and can complement a variety of investing strategies. However, they are designed to complement a well-founded portfolio rather than to serve as the focal point of the portfolio.

Most people are attracted to alternative investment because they may yield a higher return than traditional investments, but note that potentially higher returns also may carry higher risks with them. What’s important to note is that alternative investments may be more illiquid than their conventional counterparts – they cannot be sold readily like stocks and bonds – and some may need to be held for a longer time horizon. Additionally, there may be unique fees or tax consequences.

Alternative investment options for your portfolio
There are many investment products available today and it sometimes may be difficult to clearly identify which investments are conventional or alternative. But below are is a list of common alternative investments along with their potential benefits and risks.

Including a small portion of your portfolio toward precious metals such as gold or silver may offset the performance of other assets in the portfolio such as stocks and bonds, because precious metals typically don’t move in tandem with conventional investments.

Gold is typically viewed as a hedge against inflation and currency fluctuations. So when inflation effects the purchasing power of a currency – say the dollar weakens against the euro – gold prices tend to rise. As a result, investors place their money in gold during economic and market downturns.

Investing in gold can be accomplished in several ways, including futures funds, exchange-traded funds, mutual funds, bars, and coins. Nevertheless, since precious metals make up a small sector, prices often change dramatically. This type of volatility can create opportunities for investors in the form of high returns but it can equally result in dramatic losses.

Hedge fund offerings
Hedge funds have historically been available only to high-net-worth individuals and institutions. Hedge funds are investment pools that manage money for institutions like banks, insurance companies, as well as individuals who meet the federal definition of a “qualified purchaser” in terms of net worth and income.

Hedge funds are typically organized as limited partnerships where the fund managers are the general partners and the investors are the limited partners. Hedge fund investments tend to have limited liquidity on a scheduled basis as a result these alternative investments are subject to special regulatory requirements different from mutual funds.

Funds of hedge funds invest in a variety of hedge funds with many different strategies and asset classes with the purpose of reducing overall fund risk through increased diversification. Fund of hedge funds are available to investors that meet the accredited net worth standards of at least $1 million. Fees of hedge funds are higher because of the type of portfolio management and increased trading costs.

Fund of hedge funds are registered with the SEC under the Investment Company Act of 1940 and as securities under the Securities Act of 1933. They may also come in the form of a private offering which will need to adhere to stricter accredited investor standards. Fund of hedge funds can be complicated investment vehicles which often use leverage, lack transparency, may be subject to restrictions, and may include other speculative practices.

Mutual funds with alternative strategies
Mutual funds are offered in many asset categories, including real estate and commodities. Some mutual funds can mimic hedge fund strategies and may be a good option if you’re interested in alternative investments but don’t meet the accredited investor standards.

In contrast to hedge funds and fund of hedge funds with their higher fees and possible restricted liquidity, these types of mutual funds are relatively low cost and are very liquid – they can easily be bought or sold in a public market. As a result they are accessible to a wider range of investors and therefore mutual funds with alternative strategies are prohibited by law in using high leveraging to boost yields as is common with many hedge funds.

Nevertheless, alternative mutual funds do use aspects of hedge fund investing such as employing both long- and short- investment tactics, trading complex derivative products, and short selling. If you are an investor that is looking to help offset market swings or specific sector swings and you understand the risks that may be involved investing in alternative investments, alternative mutual funds may be something to consider adding to your portfolio.

Managed futures funds
Managed futures funds are formed for the purpose of investing assets in the investment vehicles and trading strategies deemed appropriate by commodity trading advisors (CTAs). These specialized money managers use futures, forwards, options contracts and other derivate products traded in U.S. and global markets as their investment vehicles. CTAs are required to be licensed and are subject to the regulations of the National Futures Association and the Commodities Trading Futures Commission (CFTC).

Managed futures are speculative in nature, involving high risks, may carry higher fees, and have limited liquidity. Nevertheless, managed futures investments have been popular investments for high-net-worth individuals and institutional investors for the past several decades. Their appeal comes from their ability to provide investors with greater portfolio diversity by increasing exposure to global investment opportunities and other sectors such as commodities.

There are several categories of managed futures in terms of structure and investment objectives. They may be available to investors in the form of a private offering subject to higher accredited investor standards according Regulation D guidelines of the Securities Act of 1933.

Real estate investment trusts
A popular type of alternative investment is commercial real estate. Until recently commercial real estate has been mostly inaccessible to retail investors and was widely enjoyed by high-net-worth individuals and institutional investors for its potentially higher yields and diversification attributes. Since the inception of real estate investment trusts (REITs), investing in commercial real estate has become available to wider range of investors.

REITs pool money from investors and invest the funds in properties ranging from office buildings to apartment complexes to hospitals and warehouses. REITs are offered to investors in two forms: traded and non-traded. Both offer exposure to commercial real estate assets.

Publicly traded REITs can be easily bought and sold on a daily basis on active secondary market. However, they tend to be more volatile.

Non-traded REITs are illiquid investments appropriate for investors with a long-term investment time horizon of at least 5 to 10 years. Non-traded REITs are not aligned with stock and bond market movements so they add great diversification to a portfolio.

Other alternatives
Alternative investment can also include assets such as art, gems, rare collectibles, and antiques. In addition, venture-capital funds are considered alternative investments. These alternative investments can help provide investors with added diversification and can help balance out performance across various market swings.

Considering alternative investments
Alternative investments can potentially boost your portfolios returns while helping you reduce market exposure and overall portfolio volatility. However, because of a lack of a secondary market for some alternative investments and restricted liquidity for others, as well as the higher risks associated with them, alternative investments should be used as complements to traditional portfolios consisting of equities and fixed-income instruments.

Moreover, because alternative investments often require more professional management than conventional investments, it’s important to look to experienced money managers for help such as your Financial Advisor.

Alternative investments include gold, real estate, hedge funds, funds of hedge funds, commodities along with others and are generally used to round off your portfolio’s performance because alternative investments are typically not correlated to traditional markets such as equities and fixed income.

Alternative investments are often illiquid, with longer investment time horizons and carry higher risks, and often require professional money managers.

Investors must meet a criteria outlined by the law, ranging from product to product, in order to take advantage of alternative investment opportunities.

How Does an Alternator Work?

March 7th, 2021 by dayat No comments »

The Alternator

An automotive charging system is made up of three major components: the battery, the voltage regulator and an alternator. The alternator works with the battery to generate power for the electrical components of a vehicle, like the interior and exterior lights, and the instrument panel. An alternator gets its name from the term alternating current (AC).

Alternators are typically found near the front of the engine and are driven by the crankshaft, which converts the pistons’ up-and-down movement into circular movement. Some early model vehicles used a separate drive belt from the crankshaft pulley to the alternator pulley, but most cars today have a serpentine belt, or one belt that drives all components that rely on crankshaft power. Most alternators are mounted using brackets that bolt to a specific point on the engine. One of the brackets is usually a fixed point, while the other is adjustable to tighten the drive belt.

Alternators produce AC power through electromagnetism formed through the stator and rotor relationship that we’ll touch on later in the article. The electricity is channeled into the battery, providing voltage to run the various electrical systems. Before we learn more about the mechanics of the alternator and how it generates electricity, let’s look at the various parts of an alternator in the next section.

Alternator Components

For the most part, alternators are relatively small and lightweight. Roughly the size of a coconut, the alternators found in most passenger cars and light trucks are constructed using an aluminum outer housing, as the lightweight metal does not magnetize. This is important since aluminum dissipates the tremendous heat generated by producing the electrical power and since the rotor assembly produces a magnetic field.

If you closely inspect an alternator, you’ll find it has vents on both the front and back side. Again, this aids in heat dissipation. A drive pulley is attached to the rotor shaft on the front of the alternator. When the engine is running, the crankshaft turns the drive belt, which in turn spins the pulley on the rotor shaft. In essence, the alternator transfers the mechanical energy from the engine into electrical power for the car’s accessories.

On the back side of the alternator you’ll find several terminals (or connecting points in an electrical circuit). Let’s take a look at those:

S terminal – Senses battery voltage
IG terminal – Ignition switch that turns the voltage regulator on
L terminal – Closes the circuit to the warning lamp
B terminal – Main alternator output terminal (connected to the battery)
F terminal – Full-field bypass for regulator

Cooling is essential to an alternator’s efficiency. It’s easy to spot an older unit by the external fan blades found on the rotor shaft behind the pulley. Modern alternators have cooling fans inside the aluminum housing. These fans operate the same way, using mechanical power from the spinning rotor shaft.

As we start to disassemble the alternator, we find the diode rectifier (or rectifier bridge), the voltage regulator, slip rings and brushes. The regulator distributes the power the alternator creates, and it controls the output of power to the battery. The rectifier bridge converts the power, as we’ll learn in the next section, while the brushes and slip rings help conduct current to the rotor field winding, or wire field. Now let’s crack the coconut open.

Opening the alternator reveals a large cylinder with triangular finger poles around the circumference. This is the rotor. A basic alternator is made up of a series of alternating finger pole pieces placed around coil wires called field windings that wrap around an iron core on the rotor shaft. Since we know the pulley attaches to the shaft, we can now visualize how the rotor spins inside the stator. The rotor assembly fits inside the stator with enough room or tolerance between the two, so the rotor can spin at high speeds without striking the stator wall. On each end of the shaft sits a brush and a slip ring.

As we touched on briefly, alternators generate power through magnetism. The triangular finger poles fixed around the circumference of the rotor are staggered, so the north and south poles alternate as they surround the wire rotor field windings. This alternating pattern creates the magnetic field that in turn induces voltage into the stator. Think of the stator as the catcher’s glove as it harnesses all the power created by the spinning rotor.

All these components work together to give us the power we need to run our vehicles. Tesla captured this electrical energy and used it to light up cities, but we only need enough volts to power our stereo, lights, windows and locks. Let’s take a look at how the alternator produces that power in the next section.

Understanding Alternator Power Output

In the early days, cars used generators rather than alternators to power the vehicle’s electrical system and charge the battery. That’s not the case anymore. As automotive technology evolved, so did the need for more power. Generators produce direct current, which travels in one direction, as opposed to the alternating current for the electricity in our houses, which periodically reverses directions. As Tesla proved in 1887, alternating current became more attractive as it generates higher voltage more efficiently, something necessary in contemporary automobiles. But car batteries can’t use AC power since they produce DC power. As a result, the alternator’s power output is fed through diodes, which convert the AC power to DC power.

The rotor and the stator are the two components that generate power. As the engine rotates the alternator pulley, the rotor spins past three stationary stator windings, or wire coils, surrounding a fixed iron core that makes up the stator. This is referred to as a three-phase current. The coil windings are evenly spaced at intervals of 120 degrees around the iron shaft. The alternating magnetic field from the rotor produces a subsequent alternating current in the stator. This AC current is fed through stator leads into a connecting set of diodes. Two diodes connect to each stator lead to regulate the current. The diodes are used to essentially block and direct the current. Since batteries need DC current, the diodes become a one-way valve that will only allow current to pass in the same direction.

Three-phase alternators have three sets of windings; they’re more efficient than a single-phase alternator, which produce a single-phase AC current. When working properly, the three windings produce three currents that make up the three phases. Adding all three together produces the total AC output of the stator.

The two basic stator winding designs are delta wound and wye style. Delta wound are easily identifiable by their shape, as they’re triangular. These windings allow for a high current flow at lower RPM. Wye windings resemble the flux capacitor seen in “Back to the Future.” These windings are ideal for diesel engines, as they produce higher voltage than delta stators at even lower RPM.

After the AC/DC conversion, the resulting voltage is ready to use in the battery. Too much or too little voltage can damage the battery, as well as other electrical components. To ensure the correct amount, a voltage regulator determines when and how much voltage is needed in the battery. One of two types of regulators are found in most alternators: The grounded regulator works by controlling the amount of negative or battery ground going into the winding in the rotor, while a grounded field type works the other way around – by controlling the amount of battery positive. Neither poses an advantage over the other.

With so many components working to create the electricity vital for our vehicles, it’s safe to say the alternator is a crucial component under the hood. But like many parts on our cars, they fail. The next section will give you an idea of how to determine if you are about to be stranded and what you can do if you need to replace your alternator.