Bright investments seem appealing on the surface with their high returns, but not everything that glitters is gold. As investors, we need to look beyond the numbers and dig deeper into the investment strategies and risk exposures. This article analyzes some of the common bright investment schemes, their inherent risks, and things to watch out for when seeking high returns.
Leverage and derivatives magnify returns but also risk
Many bright investment managers employ leverage and derivatives like options or futures to juice up returns. While this can generate outsized gains in good times, it also blows up risk on the downside. Even small market fluctuations can wipe out the entire capital when leverage is high. Investors get drawn in by past returns only to find their money gone when volatility strikes.
Illiquidity prevents investors from accessing funds when needed
Bright investments often come with liquidity compromises. Asset classes like private equity, venture capital, real estate, infrastructure etc. are less liquid than public stocks and bonds. While expected returns are higher, the tradeoff is that investors cannot access their money for years. If sudden cash needs arise, investors are left high and dry despite seemingly solid portfolio returns on paper.
Opaque fee structures erode net returns substantially
Complex bright investment products tend to charge excessive fees in various forms that take a big chunk out of net returns. Management fees, performance fees, early redemption fees, sales loads and other costs can total up to 5-10% recurring fees per year. This slowly bleeds investors dry without realizing it. The high headline returns often do not translate to actual investor experience once fees are accounted for.
Unsustainable returns dependent on ever-growing capital flows
Ponzi-esque bright investments rely on a constant inflow of fresh investor money rather than actual business fundamentals to generate returns. As long as hype brings in more capital, earlier investors earn high returns from the funds put in by later ones. The music stops when the depletion of greater fools willing to buy in causes the entire scheme to collapse, leaving the last cohort of investors suffering huge losses.
Bright investments carry higher risks that investors need to deeply examine rather than be bedazzled by the surface sheen of their enticing returns. Sustainable investing requires balancing return expectations with proper diligence into risk controls, transparency, liquidity terms and fee structures.