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High-net-worth-individuals have access to exclusive investment options that regular investors may not have. The large size of the investible asset HNWIs have opened the doors for them to varied investment vehicles. However, many assume that with access to wealth and a plethora of planners, HNWIs may have smooth navigation with all things finance. In reality, an incredible amount of strategizing, planning, and investment allocation planning goes behind retaining, protecting, and making their wealth. For this reason, it is also highly recommended that HNWIs consult a financial advisorfor further assistance in managing their wealth.
In this article, we will explore the different investment options that high-net-worth individuals may consider including as part of their investment portfolio. Some of them are quite common however, most of them are one-of-a-kind investments that are available exclusively to HNWIs, courtesy of their high entry cost or risk-reward ratio.
But before moving on, let us understand who ahigh-net-worth individual is.
What Is An Alternative Investment
An alternative investment is a financial asset that doesnât fall into conventional asset categories, like stocks, bonds and cash.
Alternative investments include private equity, venture capital, hedge funds, managed futures and collectables like art and antiques. Commodities and real estate can also be classified as alternative investments.
Pros And Cons Of Alternative Investments
Alternative assets are attractive because they offer diversification, have less correlation to the stock market than traditional investments, and can be a hedge against inflation.
Some invest in alternatives with the hope that theyll outperform the market, though data compiled above suggests that, on average, most alternative assets dont generate better returns than the S& P 500.
Alternative investments also come with some unique challenges. They can be risky and lack the regulation and transparency investors are used to when buying and selling listed equities. Certain alternative investments can be relatively illiquid, hard to buy or sell, and expensive to maintain.
And actually making these alternative investments can be more complicated than simply buying equities on an exchange.
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The New 40% Allocation Rule For High
At the end of this month, the current economic expansion that started back in June of 2009 is about to break the record for the longest economic expansion in our countrys history according to the National Bureau of Economic Research, which started tracking expansions after World War II.
With the average expansion lasting around 3.25 years, we may be long overdue for another recession. Just like dogs who can seemingly sense disasters before they strike, ultra-wealthy investors and institutional investors have a knack for sensing economic disasters before they strike.
What can you learn about the recent asset allocation strategies of ultra-high-net-worth investors that can help you prepare for the next recession?
A good place to start is to model the pre-recession allocation of the ultra-wealthy. A peek inside the exclusive TIGER 21 group a peer-to-peer network of high net worth individuals is often very insightful.
For background, TIGER 21s membership base is comprised of more than 500 North American and London-based entrepreneurs and investors, who manage an average of more than $10 million of investable assets per member.
The net worth figures are undoubtedly higher. Based on a survey of its members as reported in TIGER 21s Third Quarter 2018 Asset Allocation Report, real estate investments increased to 28% of members assets.
The ultra-rich are investing differently in 2019
What was Wall Street really trying to accomplish with the 60/40 Rule?
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North Saanich British Columbia
Average net worth: $1,919,655
“North Saanich is a highly desirable rural-residential area. Its long coastline on three sides affords many housing sites with excellent views of water, islands and mountains. Its rolling interior lands afford views of hills and valleys and a generous feeling of open space and rapport with nature.”Read more about the self-described “finest rural-residential area in all of Canada” here.
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Performance Benchmarking And Return Expectations
Throughout 2021, alternatives demonstrated their ability to weather economic volatility and manage risk while producing returns that met or exceed investor expectations. According to the 2021 EY Global Alternative Fund Survey, more than half of investors surveyed report increasing value delivered by alternative fund managers in the last two to three years, with investors overwhelmingly indicating that alternatives met or exceeded their return expectations.¹ Across alternatives, an average of 86% of investors said performance had met or exceeded expectations in 2021.²
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Clients should contact their Merrill financial advisor for a personalized version.
1 Impact investing and/or Environmental, Social and Governance managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
2 Diversification does not ensure a profit or protect against loss in declining markets. Alternative investments involve limited access to the investment and may include, among other factors, the risks of investing in derivatives, using leverage, and engaging in shorts sales, a practice which can magnify potential losses or gains. Alternative investments are speculative and involve a high degree of risk and volatility.
Index definitions.
S& P 500 Total Return Index : A market-capitalization-weighted index that measures the market value of 400 industrial stocks, 60 transportation and utility company stocks and 40 financial issues.
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The Increasing Prominence Of Alternative Investments
Thomas H. Ruggie, ChFC®, CFP®, Founder & CEO, Destiny Family Office.
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Alternative investments that provide an alternative to the more traditional investment universe of stocks and bonds are becoming less alternative as greater numbers of ultrahigh net worth individuals and similarly qualified investors seek potentially greater returns in ways that dont automatically necessitate greater risk. A recent EY report found that 81% of ultrahigh net worth investors surveyed hold alternative investments in their portfolios.
For the appropriate investor, alternatives offer a range of opportunities that can support specific investment strategies and objectives, including the tailoring of risk management profiles, balancing risk against return based on risk tolerances and meeting specific investment goals . While all investments come with some degree of risk, alternatives offer the potential for significant upside when compared with more traditional asset classes.
There is another vantage point from which to view alternative investments: the perspective of ultrahigh net worth individuals and families and their personal aspirations to impact the world around them. A recent report by KKR found that a significant and growing amount of high net worth families are focused on social change, using their assets to promote education equity, environmental progress, disease cures, and medical research, alongside other public objectives.
Best Alternative Investments In 2022
Disclosure: This post may receive compensation from partners listed through affiliate partnerships, at no cost to you. This doesnt influence our ratings, and the opinions are our own. Learn more here.
The stock market is likely one of the most common ways to invest but it certainly isnt the only way to invest.
In fact, a recent trend is seeing many investors look for alternative investments to diversify their portfolios.
And in this article, Im going to show you the best alternative investments to grow your net worth.
In this article
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Outlook For Alternative Investments
The overall market for alternative investments could grow to $14 trillion by 2023, according to a report by Preqin, a data intelligence provider. Its report defines hedge funds and private equity as classes of alternative investments.
Part of the reason for this may be that investment firms have lowered the entry requirements for mutual funds that are oriented toward alternatives. Also, investors themselves have developed a taste for something besides the usual mix of bonds, mutual funds, and exchange-traded funds.
Many emerging economies are switching from a savings-oriented approach to an investment approach, making themselves attractive to investors seeking new opportunities.
However, this outlook may be conservative considering the arrival of investing in cryptocurrencies such as bitcoin. This investment option could falter, but the amount of interest in it from institutions worldwide suggests that it could be a viable alternative for those seeking high-risk/high-return vehicles.
Another investment that is attracting a lot of money is equity crowdfunding. Individual investors can purchase shares of a new company through online sites that offer these opportunities.
This is a very high-risk investment because many new companies fail. But there are enough investor success stories to make this option attractive for even small investors.
West Vancouver British Columbia
Average net worth: $4,536,269
The West Vancouver website wants you to know: “They sound like the same city, but theyre not! West Vancouver and Vancouver are distinct municipalities separated by a few hundred metres of sea, but connected by the Lions Gate Bridge. Ringed by mountains and ocean, West Vancouver delivers some of everything the West Coast and beautiful BC has to offer, wrapped up in a smaller and easy-to-visit package.”
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How Can Alternative Investments Be Useful To Investors
Some investors seek out alternative investments because they have a low correlation with the stock and bond markets, meaning that they maintain their values in a market downturn. Also, hard assets such as gold, oil, and real property are effective hedges against inflation. For these reasons, many large institutions such as pension funds and family offices seek to diversify some of their holdings in alternative investment vehicles.
Risks Of Alternative Investments
- Lack of regulation. Not all alternative assets are registered with the SEC, and therefore are not regulated. However, they do fall under the purview of the Dodd-Frank Act and therefore their practices may be reviewed by the SEC.
- Lack of transparency. Since most alternatives are not regulated by the SEC, there are few to no public regulatory filings. This results in a dearth of information for investors.
- Low liquidity. Because many alternatives are not publicly traded, it may be difficult to buy or sell these investments. Many hedge funds and private equity funds may have lockups that commit investors to a defined period of investment during which redemptions are not possible.
- Difficult to value. In the absence of a market price, it may be challenging to determine the value of alternative investments. Valuations may vary widely depending upon the appraiser and are more vulnerable to subjectivity.
- High minimum investments. Alternatives are not structured with the average investor in mind, so minimum investment requirements can be prohibitively high.
- Greater risks. With the potential for high returns comes higher risk. Many alternative investments may involve risky strategies like short selling or trading complex derivatives.
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Regulation Of Alternative Investments
Even when they don’t involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to the lack of regulations.
Alternative investments are often subject to a less clear legal structure than conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their practices are subject to examination by the U.S. Securities and Exchange Commission . However, they usually don’t have to register with the SEC. As such, they are not overseen or regulated by the SEC as are mutual funds and ETFs.
So, it is essential that investors conduct extensive due diligence when considering alternative investments. In some cases, only accredited investors may invest in alternative offerings. Accredited investors are those with a net worth exceeding $1 millionnot counting their primary residenceor with an annual income of at least $200,000 . Financial professionals who hold a FINRA Series 7, 65, or 82 license may also qualify as an accredited investor.
Some alternative investments are only available to accredited investorse.g., those with a net worth above $1 million, or an annual income of at least $200,000.
Alternative Investments Are Going Mainstream
It’s no secret that the ultra-rich have access to alternative investments that are often unavailable to the average investor, like expensive wine, fine art, and equity in private companies.
What may come as a surprise is just how much their portfolios are weighted towards these types of investments. Among ultra-high-net-worth investors , alternative investments make up 50% of assets, compared to just 5% for the average investor.
Read on to find out how the ultra-wealthy incorporate alternative investments into their portfolios.
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Small Businesses And Private Equity
Another important part of a diversified portfolio for UHNWI is investing in small businesses or private equity opportunities. Whether you are investing to passively multiply your money, or as a strategic partner, few investment opportunities pose the chance for such high returns. Other things to consider include:
- Pro- Opportunity to multiply your money anywhere from 3-10x
- Pro- Chance to invest in different industries or passions
- Con- Risk of losing all of your capital
Private Equity And Real Estate Were The Only Alternative Investments To See Portfolio Growth From High
High-net-worth families gave private equity and real estate larger shares of their portfolios in 2020 compared to 2017, with both notching 3% gains. Those are the largest percentage gains among all assets, including traditional investments.
This group allocated 27% of their assets to private equity in 2020. Only listed equities accounted for a larger share of their portfolio. Real estate made up 11% of their assets, the third-largest share.
Hedge funds saw the largest decline in portfolio shares with a 6% reduction to account for just 6% of the portfolios of high-net-worth families in 2020, while private credit and other real assets also experienced shrinking shares.
DATA SOURCE: KKR .
Private equity investments by high-net-worth investors are projected to continue to grow.
Bite, an alternative investment platform, predicts 9% annual growth in private equity investments from those investors through 2024 due to technological improvements that will increase ease and efficiency of investing in private equity, solid historical returns, and the desire for diversification.
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Reasonably Safe Alternative Investments
As volatile as the stock market can be, many investors have been looking into safer ways to invest their money. So, “alternative investments” have become increasingly popular. An alternative investment is any investment other than the three traditional asset classes: stocks, bonds and cash. But alternative investments don’t take the place of those more traditional assets. Investors shouldn’t sell their stocks, cash out their savings accounts and put all their money in these less traditional options. Most financial experts agree that alternative investments are best when used to diversify financial portfolios. In other words, instead of putting all of your money in stocks, put some in stocks, some in bonds, and some in alternative investments like hedge funds, private equity, or even fine art and wine.
Historically, many of these alternative investments have been more popular among high-net-worth individuals and institutional investors, such as private endowments. That’s because many alternative investments require larger initial investments than stocks or bonds. Also, while it may not be the case with fine art, wine or other collectibles, almost all alternative investments are less liquid than traditional investments, meaning they can’t be cashed in as quickly or easily. But despite that, there are some advantages to alternative investments. Read on to find out those advantages, and educate yourself before you dip your toes into those murky waters.
What Is Considered Very High Net Worth In 2022
According to Forbes, high net worth individuals are broken up into three categories.
Now that we have established who qualifies as having ultra high net worth in 2022, lets take a look at some of the ways UHNWI are investing.
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Cash And Cash Equivalents:
If you analyze the asset allocation breakdown of high-net-worth and ultra-high-net-worth individuals, you will see that even though stocks, bonds, and alternatives form a majority of their portfolio, they do not completely neglect cash and cash equivalents. As per a 2020 survey, ultra-high-net-worth individuals maintain 9% of their portfolio as cash and cash equivalents. In contrast, high-net-worth individuals invest only 2% of their portfolio in cash and cash equivalents. Cash and cash equivalent investments are important for your portfolio because they bring liquidity and easy access to funds. You can secure a portion of your portfolio in cash and cash equivalents to ensure you have ready access to funds, if required, in case of events like a medical emergency, unemployment, salary cut, etc. However, cash and cash equivalents do not generate any note-worthy investment returns. Hence, such investments can be a small part of your broad portfolio rather than consuming a large share. Ideally, you can reserve 2-3% of your portfolio in this form of investment. Alternatively, you could also use cash and cash equivalents to create an emergency reserve for your future unexpected needs.
The Value Of Rare Whisky Classic Cars Wine And Handbags Are Up Over 100% Over The Past 10 Years
Luxury goods and other collectibles, despite their flashiness, dont make up notable slices of the alternative assets portfolios of the wealthy. However, the value of luxury goods has grown by 129% over the past 10 years, as measured by the Knight Frank Luxury Investment Index.
Rare whisky has seen explosive growth in value over that period with a 478% increase. Handbags, wine, and classic cars have also notched increases in value of over 100% over the past ten years.
COVID-19 has thrown a wrench in luxury goods investing. Values of art, rare whisky, diamonds, jewelry, and coins dropped in 2020 as supply chain issues crunched production and delivery and normal methods of sales like auctions and other face-to-face interactions were snarled by the pandemic.
Clearly, some luxury goods have grown significantly in value and can offer many of the same benefits of other alternative investments. So why do they hardly register in the alternative investment portfolios of the wealthy?
There are a few reasons:
- Luxury goods are illiquid. They can be expensive and time-consuming to buy and sell even in small quantities.
- Theyre risky and relatively unregulated counterfeit art, for example, is a long-standing problem and sales are not always reported.
- Historical data for particular items can be lacking.
- Some luxury goods can require significant costs over time for things like maintenance and upkeep.
DATA SOURCE: KNIGHT FRANK . FURNITURE DATA IS FROM Q2 2020.
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