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Alternative Investment Industry

In today’s uncertain economic climate, whispers of an impending recession can be unnerving for many. With memories of past downturns, one might naturally wonder how to shield their hard-earned savings from the stormy markets ahead. 

While traditional stocks and bonds have long been the bedrock of investment portfolios, they can be vulnerable in such tumultuous times. That’s where “alternative investments” come in. As the financial landscape evolves and people seek ways to hedge against market uncertainties, this category has emerged as a beacon, offering diversification and the potential for resilience even when traditional avenues falter.

As always, it’s important to consult your financial advisor for advice whenever you are considering any investment moves to assess whether such investments are suitable for you based on your investment goals, risk tolerance, and financial situation.

What Is an Alternative Investment?

An alternative investment refers to an asset that is different from traditional stocks, bonds, and cash. Unlike traditional forms of investments, they don’t fit neatly into the standard categories most people are familiar with. They comprise a vast range of assets, from real estate and commodities to hedge funds, private equity, and even fine art.

A defining feature of alternative investments is they have a low correlation to traditional financial markets. This means that their returns don’t always align with the fluctuations of stock or bond markets. Why is this significant? Because it can provide investors with a powerful tool: diversification. When stocks plunge, real estate or commodities may remain stable or even appreciate, potentially cushioning an investor’s portfolio against volatilities. In the turbulent sea of financial markets, think of alternative investments as lifeboats that may keep you afloat when the bigger ship is taking on water.

For example, is real estate an alternative investment? It is indeed. Within the broader spectrum of investing, various asset classes in real estate—such as residential, commercial, or land—can present unique opportunities. By investing in these classes, you’re banking on tangible assets. Consider the appeal of owning a prime piece of commercial property in a growing urban center. As the city grows, so does the demand for office and retail spaces. This demand may insulate your investment from the wilder swings of stock markets.

It’s important to note that alternative investments are not without their challenges and risks. To start, they often require a higher initial investment. These investments can also be less liquid, meaning it could be harder to quickly convert them into cash and investors may hold them for an undetermined period of time. Additionally, they might lack the transparency of traditional markets, given that many aren’t subject to the same regulatory oversight.

Thankfully, thanks to technological advancements, even smaller investors can access realms that were once exclusive to the uber-rich. Real estate crowdfunding platforms, for instance, let you invest in properties with as little as a few hundred dollars. Similarly, platforms like Kickstarter allow the backing of innovative products or businesses, making equity crowdfunding a reality.

It’s important to note that alternative investments, like all investments, carry some degree of risk. Alternative investments, similar to stocks, bonds, mutual funds, and exchange-traded funds, can lose value—even their entire value—if market conditions sour. You should carefully consider the risks of any investment prior to investing.

Awareness of Alternative Investment Vehicles

As the financial market continues to evolve, the variety and accessibility of alternative investments grow. With the digital age at its peak, the question of where to invest money online becomes increasingly relevant. Investors have more information and tools at their fingertips, leading to a better understanding of non-traditional opportunities. 

This vast reservoir of information has inevitably led to an enlightened investor base. As people gain a better grasp of alternative assets—whether real estate crowdfunding, peer-to-peer lending, life settlements, or cryptocurrency—the initial hesitancy wanes. Once-complicated concepts are now discussed in mainstream financial circles, and their potential benefits are dissected in popular investment podcasts .

So, what are the most popular alternative investment options? Let’s look at a few.

What Are the Types of Investment Alternatives?

Some of the most popular alternative investment vehicles that high-net-worth individuals can tap into include:

1. Hedge Funds

Standing apart from standard mutual funds, hedge funds use a diverse array of advanced strategies to aim for higher returns. For instance, a hedge fund could employ “arbitrage”—a tactic that capitalizes on pricing disparities of an identical asset across various markets. Imagine a stock that’s selling for $50 in the U.S. market but $51 in the U.K. market. The fund could simultaneously buy the stock at the lower price in the U.S. and sell it at the higher price in the U.K., pocketing the difference.

2. Commodities

These are raw materials or primary agricultural products that can be bought and sold. Consider gold. Many people wear gold jewelry, but beyond its beauty, gold is also a commodity that investors purchase as a potential hedge against economic uncertainty. Another example is wheat. Every time you have a slice of bread or a bowl of pasta, you’re consuming products made from wheat, a staple agricultural commodity. The prices of commodities like gold and wheat can fluctuate due to elements like supply, demand, weather patterns, and global economic conditions. Investors in the commodities market aim to capitalize on these price shifts.

3. Commodity Pools

These are investment vehicles that aggregate funds to trade in commodity futures, options, or a combination of both. The PIMCO Commodity Real Return Strategy Fund is a notable example, as it seeks to potentially offer protection against inflation by diversifying its investments across multiple commodities. Investors in such pools gain exposure to the commodities market without the need to manage individual contracts. Their collective strategy and scale can potentially offer diversification benefits and potential risk management advantages.

4. Life Settlements

A life settlement entails purchasing a life insurance policy from a qualified policyholder for an amount surpassing their policy’s cash surrender value. This alternative can prove invaluable for policyholders who can no longer afford or see a need for their life insurance, rather than merely surrendering or letting their policy lapse.

Life settlements present a unique asset class, and may offer investment diversification and potentially amplifying returns. Life settlement investments are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional who is well versed in this field to determine if life settlements are a viable option for you.

5. Collectibles

Collectibles, such as art, rare coins, classic cars, wine, and even Pokemon cards, aren’t merely pieces of aesthetic pleasure or hobbies; they can be genuine investment opportunities. Consider wine, for example; it’s intriguing how its value isn’t solely dictated by traditional market dynamics. Instead, it’s intricately tied to factors like weather patterns, the quality of a vintage, and evolving consumer trends. These unique factors mesh with the supply and demand principles to create a distinctive investment landscape. As a testament to its potential, the London International Vintners Exchange (Liv-ex) Fine Wine 100 index saw an impressive surge of 270.7% from July 2001 to July 2021, underscoring the lucrative returns wine can offer to discerning investors.

6. Venture Capital

This avenue involves investing in startups and early-stage companies, hoping for high returns as these businesses grow. A prime example is Dropbox, which, after receiving a seed investment of around $1.25 million from Sequoia Capital in 2007, went public in 2018 with a valuation of approximately $12 billion. Sequoia’s early stake, consequently, ballooned in value, highlighting the potentially lucrative returns of venture capital. However, this also exemplifies the high-risk, high-reward nature of this alternative investment.

7. Private Equity

This sector is renowned for acquiring established businesses, enhancing their value, and subsequently selling them at a profit. A prime illustration is the 2006 purchase of Dunkin’ Brands by multiple alternative investment companies for $2.4 billion. During its tenure under these firms, Dunkin’ experienced significant rebranding, optimized its menu, and broadened its global presence. When they took the company public in 2011, its valuation had soared, culminating in a sale for $11.3 billion in 2020. This trajectory underscores the private equity model: capital infusion, operational optimization, and strategic growth over extended periods.

8. Private Real Estate Investment Trusts (REITs)

For accredited investors seeking diversified real estate exposure, private REITs offer a potentially lucrative avenue. Accredited investors have access to these non-traded or private REITs, which might offer potentially higher returns but come with less liquidity. The Blackstone Real Estate Income Trust (BREIT), for instance, leverages pooled capital to secure investments in U.S. properties. With stakes in high-value assets such as luxury apartments and prime industrial spaces, these funds provide a blend of diversified assets and expert management, catering to investors with substantial capital.

9. Structured Products

Structured products are special bank-offered investments linked to the success of things like stock indexes. For example, an investor might get a fixed return unless a major stock group like the S&P 500 drops significantly over five years. Another kind called “principal-protected notes” ensures you get back what you invested even if the linked stocks do badly, but there’s a limit to how much you can earn. They can be good for balancing risk and reward, but they are tricky investments and need a close look before you take the plunge.

It’s important to note that alternative investments, like all investments, carry some degree of risk. Alternative investments, similar to stocks, bonds, mutual funds, and exchange-traded funds, can lose value—even their entire value—if market conditions sour. You should carefully consider the risks of any investment prior to investing.

What Are Alternative Investments for Non-Accredited Investors?

Historically, alternative investments were often reserved for high-net-worth or institutional investors. However, the tide is changing, opening doors for non-accredited investors. Below are some popular opportunities for non-accredited investors, although accredited investors can take advantage of these as well.

1. Private Investing Platforms

Private investing platforms have revolutionized the investment landscape by providing non-accredited investors with access to opportunities that were once reserved for high-net-worth individuals. Take SeedInvest, for example. With a starting investment of $1,000, individuals can delve into carefully vetted startups, ensuring both accessibility and quality. Such platforms have become indispensable for those wanting to explore diverse online investment options without traditional barriers.

2. Mutual Funds

The rise of mutual funds can provide a more straightforward entry into the world of alternative investments. Consider the Pear Tree Quality Ordinary, which has demonstrated a solid 5-year return of 13.72%. However, you may not want to rely solely on short-term performances; consistent long-term returns may be a better gauge of a fund’s strength. As these funds pool resources to invest in a range of assets, they naturally spread risk, allowing investors to potentially access the benefits of diversification without needing to individually own every asset.

3. Peer-to-Peer Lending

Through alternative investment platforms such as LendingClub and Prosper, peer-to-peer lending has transformed the way people invest and borrow. They directly connect borrowers with individual investors, bypassing traditional financial institutions. This approach provides non-accredited investors with a unique opportunity to earn interest similar to traditional bonds. These platforms also offer an empowering edge: investors can review and select specific borrowers based on their profiles, risk levels, and the purpose of the loan, ensuring investors are comfortable with where their money is going. This model democratizes the lending process, making it more accessible and tailored for both parties involved.

4. Robo-Advisors with Alternative Investments

Robo-advisors are digital platforms that offer automated, algorithm-driven financial planning services with minimal human intervention, often including a range of alternative investments in their portfolios. Among the pioneers in this space is Wealthfront, launched in 2008, which has grown to become a predominant figure in the robo-advisory realm. They provide a holistic financial experience, with features like their account aggregator tool, allowing users to view their entire financial landscape in one place. Beyond the standard investment management, Wealthfront offers specialized goal-setting tools like Path and Self-Driving Money, allowing users to easily tailor their financial journey. By offering a blend of automated portfolio management and comprehensive goal planning at a competitive price point, Wealthfront has made alternative investments more attainable for non-accredited investors.

5. Public Real Estate Investment Trusts (REITs) 

For non-accredited investors aiming to enter the real estate market, public REITs can provide an accessible route. Medical Properties Trust is one such example that offers a specialized focus on the healthcare niche. It stands out as the second-largest owner of hospital beds in the U.S., with a presence extending to Europe, Australia, and Colombia. The REIT adopts a triple net lease model with over 50 operators, ensuring tenant-covered maintenance, taxes, and insurance, thereby offering stability. Despite pandemic-related challenges in 2020, Medical Properties Trust showcased resilience, making acquisitions worth nearly $3.4 billion and witnessing a 46% revenue growth compared to the previous year. By investing in such REITs, individuals can tap into a broad spectrum of U.S. real estate assets, enjoying benefits from steady cash flows and property value appreciation.

6. Cryptocurrencies

Cryptocurrencies, often referred to as digital or virtual currencies using cryptographic security, represent a cutting-edge segment within alternative investments. Pioneers like Bitcoin and Ethereum have paved the way for a decentralized financial future. Non-accredited investors can tap into this market through user-friendly platforms like Coinbase, which offer a seamless experience to purchase, hold, and trade these digital assets.

What Are the Fastest Growing Alternative Investments?

According to a biennial report by Preqin, venture capital is slated to be the superstar of the alternative investment world. Preqin forecasts a whopping 19.1% annual growth over the next five years, culminating in a $4.17 trillion valuation. North America, in particular, is anticipated to be at the forefront of this venture capital growth, with fundraising expected to double from $118 billion in 2021 to an estimated $223 billion by the end of 2027. Other notable asset classes predicted to see substantial growth include infrastructure and private debt, with expected growth rates of 13.3% and 10.8%, respectively.

The alternative investments landscape is increasingly recognizing the growth potential of life settlements. According to Conning, by 2028, the life settlements market is anticipated to encompass an impressive $212 billion, with an average annual issuance over the next decade forecasted at around $6.4 billion. This consistent upward trajectory, as noted by the Life Insurance Settlement Association (LISA), is steering more investors toward life settlements. Given the volatility in traditional markets, many are gravitating to life settlements due to their non-correlation with standard assets, seeing them as a promising diversification avenue with potential for stability and compelling returns.

Are Alternative Investments a Good Idea?

Every investment, whether traditional or alternative, carries its own set of risks and rewards. When comparing traditional investments vs. alternative investments, the latter may provide greater diversification and can act as a hedge against market downturns.

Take, for instance, an investor aiming to build a well-rounded portfolio. They might allocate a portion of their funds to traditional equities and bonds but also earmark a segment for alternatives. By investing in real estate, they might seek passive income and capital appreciation. Venture capital could open doors to high-growth startups, while life settlements can offer a unique opportunity to capitalize on the insured lives’ policy market. Art or wine could provide both aesthetic pleasure and long-term value appreciation. 

Consult with your financial advisor about a well-balanced approach to find the right approach for your unique needs and to evaluate if alternative investments can be a valuable addition to your portfolio.

Life Settlements: A Promising Alternative Investment Avenue

In today’s dynamic investment landscape, life settlements stand out as a potentially promising alternative. These instruments can offer a beneficial exit strategy for policyholders and a unique opportunity for investors to diversify their portfolios. With the unpredictability of traditional markets, the intrinsic value of life settlements, combined with their growing mainstream acceptance, makes them an attractive choice. For forward-thinking investors seeking both resilience and potential returns, life settlements can offer a compelling option. For more information, reach out to us at i2 Advisors to get started.