March 30, 2022 – When it comes to investing, you’re likely familiar with stocks and bonds, but there’s a whole universe of possibilities outside of these traditional asset classes. Alternative assets are a robust opportunity set to complement a portfolio of traditional investments:
- Non-traditional. Alternatives are investments in assets other than stocks, bonds, and cash and can utilize investment strategies that go beyond traditional methods such as tracking an index.
- Benefits. Alternatives may behave differently than typical stock and bond investments and may offer enhanced returns, broader diversification, and/or reduced risk.
- Considerations. Alternative investments can be less regulated, liquid, and/or transparent, charge higher fees, be more complex to understand, and involve varying degrees of risk.
What are Alternative Investment Strategies?
Predominant types of Alternative Investment Strategies include:
- Private Equity: Private Equity offers access to non-publicly traded assets via investments made into companies of all sizes and at various points of their life cycle. Specialist areas include venture capital, growth, buyouts, distressed/ turnaround, industry/ sector verticals, and secondaries.
- Private Credit: Private Credit encompasses the wide gamut of non-bank, non-public lending. It involves making loans to companies that cannot or do not wish to access the traditional lending markets. Specialist areas include direct lending, mezzanine financing, and distressed credit.
- Hedge Funds: Hedge Funds encompass various strategies involving traditional and non-traditional asset classes. They aim to provide absolute returns with a low correlation to equity and credit markets. Specialist areas include long/short equity (or credit), event-driven, global macro, arbitrage, relative value, and structured products.
- Real Assets: These are investments that seek to generate current income and capital appreciation via ownership of physical assets. These investments may provide a hedge against inflation. Specialist areas include real estate, infrastructure, transportation assets, and commodities.
Who Can Buy Alternative Investments?
Buying many alternative assets has historically been limited to financially sophisticated investors like institutions or high net worth individuals deemed qualified investors by the Securities and Exchange Commission (SEC). This protection is because most alternative investments do not trade on markets, and they’re typically unregulated by the SEC.
The specific investor qualifications depend on the type of securities offering. One of the most common types of qualification is that of the accredited investor. If you wish to purchase alternative investments as an accredited investor, you can qualify in a few different ways:
- by having an annual income of $200,000—$300,000 for a couple—in each of the prior two years, and reasonably expect the same for the current year, OR
- by maintaining a net worth of $1 million or more either alone or with a spouse (excluding your primary residence); OR
- by demonstrating “defined measures of professional knowledge, experience, or certifications” in the SEC’s eyes.
Who Should Buy Alternative Investments?
If you meet the legal qualifications, the next question is one of suitability. Determining whether alternative investments are suitable for you depends on your unique investment profile. Is your investment objective short term income or long-term growth? Can you bear to risk your entire investment, or will you rely on these funds to meet your future needs? Do you have other investments and income to sustain your lifestyle and fund your major expenditures? Can you lock your funds up for the long term or do you need to maintain access to them for current expenses or emergency purposes? These questions and others will help you determine what allocation to alternative investments, if any, is right for you. Ultimately, the goal of any investment portfolio is the proper balance of risk and return. Alternative investments offer a host of potential benefits, but only for those who can bear the accompanying risks and restrictions.
Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks.