When it comes to investing, everyone is familiar with stocks and bonds and the various equity-based funds and products traded on the public markets.
Investors, however, are less familiar with alternative assets, yet it’s a huge asset class. A recent PwC report forecasts the alternative asset market to grow to as high as $15.3 trillion in 2020.
Why Alternative Investments?
The alternative asset class is a large and popular investment class, but who’s investing in it?
Institutions and ultra-wealthy investors have long allocated significant percentages of their investment portfolios to alternatives to take advantage of one or more of the following benefits:
- Non-correlation to Wall Street
- Consistent income stream
- Above-market returns
- Long-term growth
- Inflation hedge
For those who are unfamiliar, alternative investments encompass a wide variety of asset classes. Still, at its most basic, an alternative investment is a financial asset that does not fall into one of the traditional investment categories, such as stocks and bonds.
Preferred Alternative Segments
Common alternative investments include real assets, private equity, hedge funds, commodities, precious metals, startups, derivatives, venture capital, and cryptocurrency.
Although alternative assets cover broad categories of investment options, the ultra-wealthy prefer certain segments over others. They prefer cash-flowing assets that offer long-term growth along with the inflation-hedging and volatility shielding benefits common among all alternative assets.
Although popular 20 years ago, hedge funds slowly lost the favor of savvy investors who complain about the high management fees and low returns.
They minimize their exposure to commodities and precious metals due to the lack of income. That’s why they often allocate more than 25% of their portfolios to private equity and real assets because they offer the returns the other alternative asset classes can’t provide.
The Liquidity Dilemma
Unlike publicly traded stocks and bonds, alternative investments are relatively illiquid. Some may view this as unfavorable, but savvy investors view it as a positive since illiquidity prevents the compulsive buying and selling of assets that contribute to market volatility, as seen in the public markets.
The result of Wall Street volatility is that the stock market becomes a lottery where the money is made based on speculation and not on solid financial fundamentals.
Illiquidity forces discipline. Savvy investors understand that building real wealth through cash flow and appreciation will require a long-view.
Investing long-term allows the law of averages to play out – balancing the downs with the ups. Being in an investment for too short a term can mean bearing the loss of a downturn without seeing the benefits of the rebound.
Wall Street is considered an efficient market where stock prices reflect all available information about the underlying company. Hence, there is no way to beat the market because any information affecting a stock’s price is immediately disseminated to the investing public through the various media channels.
Any informational advantages not known to the investing public would be considered inside information, and profiting from that information can get you thrown in jail for insider trading.
Alternative markets are inefficient markets, and that’s why savvy investors prefer them for generating outsized returns.
By leveraging experience, knowledge, and informational advantages, values can be found in the alternative asset class – providing opportunities for above-market returns.
Historically, alternative investment opportunities were exclusive to the wealthy and well-connected.
Still, thanks to recent regulatory changes, private investment opportunities in private equity, startups, and private real estate are available to a broader pool of investors than ever before. This is thanks to the loosening of the advertising restrictions that hamstrung these opportunities.
Investors willing to step outside the Wall Street box can take advantage of the many benefits of alternatives, including high uncorrelated risk-adjusted returns, cash flow, appreciation, and a hedge against inflation.
Investor, writer, speaker, and founder. Kyle Jones, key principal of TruePoint Capital, is accountable for investment decisions, asset management, and overseeing financial activities, operations, and investor relations. Kyle additionally is a Global Sales Leader for a large Fortune 100 technology company. Kyle received a Bachelor of Science degree from Texas State University – San Marcos.