Why Do Sophisticated Investors Want Alts
Its true alternative investments can be opaque, volatile, and illiquid. So why are individual investors increasingly interested in adding them to their portfolios? A recent study showed that ultra-high-net-worth investors committed 50% of their assets to alternative investments in 2020.
For most investors, the answer is portfolio diversification. Purchased wisely, alternative investments can provide exposure to potentially lucrative markets, provide passive income, or serve as a hedge against inflation or all three. In addition, the specialized fields also allow the mingling of business and passion projects, e.g. art lovers can build their collection with works by up-and-coming painters, while real estate junkies can own vacation property.
What Questions Should An Individual Investor Ask When Selecting A Cta For Alternative Investing
Individual investors should have a proper due diligence process, including both investment due diligence and operational due diligence to select a CTA. Some common CTA vetting questions include:
- What type of strategy is used?
- What futures markets are traded?
- What is the minimum investment size?
- What are the fees?
What Lies Ahead For Alternative Investments
Cryptocurrency especially is an interesting alternative asset to watch. Its increasingly being viewed as a store of value, thus earning the nickname of digital gold. Digital payment platforms PayPal and Venmo announced that they will support transactions in bitcoin and other cryptocurrencies driving an increase in usage and liquidity. There is also a growing number of institutional investors in bitcoin as a reserve asset and an alternative to fiat currency such as the US dollar which is showing a decline in value.
Overall, alternative investments are becoming increasingly popular with financial technology and slick, shiny apps appealing to young and young at heart investors. Increased competition, lowered costs with fintech, and an increasingly global investment market will further spur growth in these risky but promising investments.
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New Structures For A New Age
Lets make one thing clear: Alternative investments are not right for every investor.
Alternatives are typically more intricate than ETFs, they generally have less liquidity than mutual funds, and they should never constitute a majority of an investors portfolio. However, we believe that modern alternative investments offer more benefits than at any other previous time.
Like all investments products, alternatives are about tradeoffs. What do alternatives offer that more liquid products dont? They allow retail investors to access markets previously only available to institutions, they are designed to be uncorrelated with the broader equity markets, and they may be able to generate higher yield. Investors who can handle the trade-offs can take advantage of the benefits that alternative investments can provide.
From the moment alternative investments came to the marketplace, they have been surrounded by certain assumptions. For a long time, many of those assumptions were true, alternative investments were rather complex, opaque investments reserved for the extremely wealthy. As time has gone on, asset managers have continually refined the structure of their funds to make alternatives much more accessible to the individual investor and an option for many different styles of portfolios.
Alternative Investments: What Investors Need To Know
Want to go beyond stocks, bonds and cash? Alternative investments can include everything from real estate to fine art. If youre looking for another way to diversify your portfolio, alternative investments may be worth considering. Read on to discover if alternative investments make sense for your portfolio. For help with alternative investments or any other financial questions, consider working with a financial advisor.
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Is It A Good Time To Invest In Gold
So is it a good idea to invest in the gold market right now? It might be worth having some exposure, if only for the sake of portfolio diversification.
Due to ongoing supply-chain problems created by the pandemic, inflation has reached multi-decade highs in Canada, the U.S., and other parts of the world. Its putting pressure on households, and has become a major headache for central bankers.
After years of maintaining record low interest rates, central banks are starting to introduce rate hikes. That could cool down inflation, but it could also slow down economic growth. Theres also rising geopolitical risk that could impact the economy.
Theres a lot of uncertainty in the air, and it might very well be time for gold to shine again.
Drawbacks Of Investing In Gold
As they say, theres no such thing as a free lunch, and that applies equally to gold. When someone decides to invest in physical gold, they sacrifice liquidity compared to investment funds or public securities like stocks and bonds, gold is more challenging to convert into cash, and the transaction costs can be substantial. And while gold has the ability to preserve wealth over the long term, it cant produce regular income like fixed-income instruments or dividend stocks.
It can also be a challenge to store physical gold. Aside from needing a place to store their gold bars, for example, investors in physical gold have to make sure theyre protected against the added risk of loss or theft. That includes getting insurance that covers the risk of their gold holdings being stolen or somehow getting misplaced.
Investors might also hesitate to invest in gold if theyre concerned about investing responsibly. Like other industries that extract resources from the earth, the activities of gold mining companies have historically had a significant impact on the environment and the communities around them, and high-profile disasters at some sites have called attention to the health and safety risks faced by the workers in these companies. But some mining companies also show social responsibility as they offer employment opportunities, contribute to infrastructure improvement, and contribute toward health and education in the communities they touch.
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How Do Alternative Investments Work
Most alternative investment assets are owned by institutional investors or accredited, high-net-worth individuals due to their complexity, lack of regulation, and high risk.
Many alternative investments have higher minimum investments and cost structures than mutual funds and exchange-traded funds .
Furthermore, these investments have fewer possibilities to give independently verifiable performance statistics and advertise themselves to potential investors.
Alternative assets have greater beginning minimums and upfront investing fees than traditional assets, although transaction costs are typically lower owing to lower turnover.
The bulk of alternative assets are quite illiquid, especially in comparison to their traditional counterparts.
Investors are going to have a far more difficult time selling an 80-year-old bottle of wine than 1,000 shares of Apple Inc. since there are considerably fewer consumers for it.
Due to the rarity of the assets and transactions involving them, investors may have difficulty valuing alternative investments.
In general, there is little correlation between alternative investments and traditional asset classes. They frequently move in the opposite direction of the stock and bond markets due to their weak relationship.
They’re a useful tool for portfolio diversification because of this feature. Gold, oil, and real estate assets, for example, function as a hedge against inflation, which erodes the purchasing power of paper money.
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Andy Puckett Phd Professor Of Finance At Haslam College Of Business University Of Tennessee
Why do you think the ultra-wealthy are more likely to hold alternative investments than middle-class or mass affluent investors?
Alternative asset classes are often marketed as being uncorrelated with publicly available investments such as stocks and bonds. There is also a suggestion that some of these alternative investments have high returns relative to their risk. Both claims are more controversial than most in the industry would have you believe. Ultimately, I think the allure of alternative investments for the ultra-wealthy is their exclusivity, not the true expected risk-return profile of the investment.
Should most investors consider more alternative investments, like cryptocurrency, luxury items, or direct lending? Why or why not?
Yes, I think investors should consider and investigate alternative investments. However, “alternative” investments are a very diverse bucket. Invest in what you know, what has intrinsic value, or what can provide expected cash flows in the future. If an investor considers Bitcoin as an “alternative” investment, then my answer would be a resounding NO. The purported benefits of Bitcoin are that it is an alternative currency and store of value, yet Bitcoin does not satisfy the conditions that we typically use to classify either a currency or store of value. I have yet to hear a coherent explanation for why Bitcoin will be valuable in 20 years.
Characteristics Driving Female Investors
While the ladies can benefit from having more confidence when it comes to investing, male investors might be too confident. Overconfidence can lead to overtrading, which may result in high transaction fees and dampen returns. A report from SigFig found that portfolio turnover was 45% higher among male investors than female investors. The confidence disparity could also be the reason why women tend to be more risk-averse than men. A Willis Owen study showed 58% of male participants were willing to take financial risk versus only 37% of women. It appears that the female approach of double-checking numbers, taking extra steps to mitigate risk can help, and being less confident can help increase your returns.
Women tend to focus more on long-term financial goals than short-term performance. Thus, female investors tend to have greater conviction with their investment decisions. They conduct thorough research before deploying capital, and stay more resilient than men through market volatility. Another Wells Fargo study, which tracked trades from 2010 to 2015, found men are 6X more likely to make massive allocation shifts than their female counterparts. This impulse often leads to investors falling victim to market cycles.
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How Farmland Funds Offer Esg Solution And Fertile Returns
Carbon credits market gaining traction in Canada
Veripath Partners of Alberta, celebrating its 15th anniversary, is developing carbon credits for its Canadian prairie farmland funds.
As the price of carbon credits has gone up in Europe, its making carbon credit buyers really search around the world for credits, Stephen Johnston, Veripaths Managing Partner, told Wealth Professional.We dont have a regulated market in Canada for zero till carbon credits, but theres a voluntary market thats starting to develop quite quickly.
Veripath manages more than 90,000 acres of Canadian prairie farmland and has $200 million of assets under management and $400 million of private equity. It has two farmland investment funds. Veripath Farmland LP has Saskatchewan and Manitoba farmland while Veripath Farmland LP holds the rest. Johnston said its all zero-till land, so Veripaths portfolio captures carbon.
In fact, in 2021, Johnston estimates that Veripath captured 13,621 tons of carbon, the equivalent of 2,951 vehicles, with a $681,050 implied value. It also has the satellite monitoring and farmer reporting to verify that the land is zero-tilled, so it can start to sell the carbon credits.
But in addition, now, theres this extra return thats developing in Canada with the Canadian farmland portfolios. The prairies have very high usage of zero till much higher than virtually any other part of the world and zero till captures carbon, he said.
Strategy For Alternative Investments
Alternative investments typically have a low correlation with those in standard asset classes. This low correlation means they often move counter to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.
Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfoliosâtypically less than 10%âto alternative investments such as hedge funds.
The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded fundsâalso called alt funds or liquid altsâare now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and regulated, specifically by the Investment Company Act of 1940.
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Gold As An Investment
In the grand universe of investment, gold belongs under the umbrella of commodities, which are known for their sensitivity to price swings. But gold is less volatile than certain other commodities, like oil or agricultural products that can be impacted by seasonal events or economic weakness.
There are different ways to invest in gold. One way is to buy gold bullion, which is the physical metal thats refined and made into a form suitable for trading like gold bar or gold coins. Jewellery and other gold products are also popular among gold bugs though they tend to come with a mark-up due to the labour put into crafting them as well as pricing forces in the retail market.
Professional investors can also profit from price movements in gold by trading gold futures. The large majority of people arent likely to know how a futures contract works, so other vehicles like ETFs, mutual funds, or gold stocks will generally be more suitable for the average investor.
How Have Managed Futures Grown In Popularity Over The Years
Managed Futures investments started with just a few wealthy people in the inner circles of Wall Street trading firms back in the 1970s. Over time, as more traders emerged and began to offer products, the investment opportunities became more prevalent and available to the general public. First more programs came to market, spreading across the wealthy as popularity grew during the 1980s and 1990s. Then program minimums and access points expanded to commodity pools and mutual funds in the 2000s where investments could be made for as little as $2,500 USD instead of previous levels of $100,000 USD or more to access.
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European Social Entrepreneurship Funds
The European social entrepreneurship funds regulation covers alternative investment schemes that focus on social enterprises. These are companies that are set up with the explicit aim to have a positive social impact and address social objectives, rather than only maximising profit. While these enterprises often receive public support, private investment via funds still remains vital to their growth.
Why Should You Consider Alternative Investments
One of the most game-changing developments historically for individual investment portfolios has been the democratization of investment management to open up access that enables individuals to invest in alternatives, just like institutional investors. For individuals desiring the investment benefits sought and achieved for decades by pensions, endowments and foundations, allocating to liquid alternative investments may be an effective means of complementing core equity and fixed income holdings. Alternative investments can serve as an effective diversifier, a robust inflation hedge, a volatility dampener, and a means of accessing alternative exposures for growth and income.
More extensively available than ever, alternative investments are your path to invest like the institutions.
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Deep Dive On Icapital Network: Alternative Investments Leader
Offices of iCapital Network
DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech leader, discussing its history, products / services, and how it has grown to be an industry leader.
In the alternative investments sector, high-paced growth is fueling a new era of wealth management. These investments include private equity, hedge funds, real estate funds, and others that are traditionally outside public markets providing the potential for diversification and risk mitigation.
The problem with these investments was the high minimum investment amounts excluded most individuals. Even the top tier investors would refrain from locking in such a large portion of funds into a single deal. With regulatory changes in the last 8 years, individual investors are now able to participate at lower thresholds.
The boost of technology in this niche provided new and varied program structures that improved the delivery, timing, and user experience from alternative investment platforms. Being able to quickly structure transactions, onboard investors, aggregate investments, fund deals, and manage payouts has become tablestakes in the industry. The appetite from investors seeking higher yields beyond bank deposit rates is at an all-time high.
We saw the opportunity to build a tech-enabling platform that bridges the gap between institutional-quality alternative-investing opportunities and the high-net-worth community.
Lawrence Calcano , iCapital Network
Who Owns Alternative Investments
Alternative investments are typically sought and owned by institutional and accredited investors. Institutional investors are organizations that make large-scale investments they may be banks, public pensions, asset management firms, trusts, insurance companies, higher education endowments and various types of funds .
Accredited investors, on the other hand, are typically high-net-worth individuals who meet certain income and asset requirements set by the SEC.
Often, these two investing groups are the primary audience for alternative assets due to the fact such investments usually require:
- High minimum investments.
- Long lock-up periods during which shares cannot be redeemed or sold.
- Familiarity with complex fund and investment structures.
However, this does not mean retail investors are entirely shut out of alternative investments. Increasingly, more financial products have been introduced to help Main Street investors take advantage of the portfolio diversification benefits of alternative investments, while still enjoying a measure of liquidity. An example of this is exchange-traded funds . These liquid alts called so because they are more liquid than other alternative investments follow specific investing strategies and can be used by individual investors to gain diversified exposure, investing edge and daily liquidity. ETFs also eliminate many barriers to investing, like income requirements, minimum investments and lock-up periods.
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