Not too long ago, the Yale endowment generated 20.2% in returns in one fiscal year, utilizing a combination of investments, including alternative investments. Specifically, 33 percent of their funds were invested in private equity allocations. 1
Why does this matter to individual investors?
Because you too can invest directly in alternative investments and potentially reap similar rewards. Yet, many people still believe that alternative investments are only available to ultra-high-net-worth individuals. This is simply not true. Many investors simply don’t understand how to integrate alternative investments into their portfolios. More importantly, they don’t understand why they should.
Before we address the how and why, let’s be clear on what an alternative investment is, and then dispel any fear you may have.
Exactly what is an “alternative investment”?
According to Investopedia, an alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and cash. The investment news giant cites the following as examples of alternative investments: private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.
Should you fear alternative investments?
Many people hear the words alternative investments and get nervous. When, in fact, there’s no reason to. According to global investment firm BlackRock, while some alternative investments can experience higher levels of volatility than traditional stocks and bonds, as a group, they are no more volatile than any other investment. In fact, many alternatives experience far less volatility than the stock market.
Full Diversification Requires Alternative Investments
In a recent Kiplinger article, Telemus’ Chairman Gary Ran discussed the power of alternative investments, specifically, he refers to them as non-correlating assets. Ran’s main point: The market has ups and downs, but when you integrate alternative investments into your investment portfolio, you essentially insulate your financial portfolio from market volatility.
In response to times when the stock market is volatile, Ran added, “By identifying unique investment strategies that have non-traditional risk profiles and investing in assets that act differently from stocks, you will spread your risk and therefore have the opportunity to grow your portfolio while experiencing fewer bumps along the way.”
Here are 3 alternative investments you should consider:
#1 – Alternative Lending
Alternative Lending strategies provide credit to consumers and businesses for a variety of uses. Changes in financial regulations post-2008 have forced banks to significantly alter their core lending practices. Accordingly, there are lending opportunities in niche markets where the supply of capital is scarce relative to the demand for capital. Consumer and small business credit, which require more customized approaches, are two areas that larger financial institutions have retreated from, favoring instead more standardized products that can be offered on a larger scale. These smaller markets require more specialized due diligence, origination, and servicing expertise, which combined with a dearth of available capital in these markets present excellent opportunities for superior risk-adjusted returns.
#2 – Managed Futures
Managed Futures strategies are designed to achieve capital appreciation in the financial and commodities futures markets. Such strategies provide the potential for positive absolute returns in both rising and falling markets through global exposure to four major asset classes: stocks, bonds, currencies, and commodities. Managed futures have historically provided low correlations to traditional financial markets through multiple market cycles. Managed futures strategies use quantified, rules-based strategies to invest in combination of diversified futures contracts to take advantage of market trends regardless of the direction of the trend.
#3 – Venture Credit
Investors in Venture Credit provide high growth-potential companies with hybrid debt and equity financing that is more flexible than traditional credit and less dilutive than equity. Venture Credit investments seek to maximize total return primarily through current income from loans to high-growth companies and secondarily through capital appreciation on warrants and other equity positions received subject to the terms of such loans. Loans are typically made to companies financed by venture capital companies or self-funded companies, both of which maximize their equity ownership by avoiding equity issuance to finance their growth.
At Telemus, we recommend a blend of alternative investments. However, no matter which alternative investments you choose, the idea is to balance out the traditional stocks and bonds in your portfolio. If the financial markets dip for the next several months, your alternative investments are meant to offset these ups and downs.
If you have questions regarding the diversification of your investment portfolio, or would simply like a second opinion about your investment approach, please contact us. Telemus is a place where financial security is just the starting point. Our mission is to leverage your wealth to help you achieve your envisioned future.