Miami, FL - 4/11/2023
For The Right Investor, It May Be Time To Consider Institutional Alternative Investments
After a tough year where just about every asset class ended in the red, including “safe havens” like U.S. Treasuries, investors are hunting for opportunities, including in alternative investments, to boost their portfolios in 2023. More people could be taking note: As alternatives slowly merge with the mainstream and are offered as active investment solutions, the size of the market could grow to more than $17 trillion by 2025, according to a report by Preqin, a data intelligence provider.
For the right investor, alternatives can play an important role in a well-diversified portfolio. “Alternative investment” is a broad term that includes a large number of financial assets, outside of traditional securities such as stocks, bonds and cash, that can often mitigate the impact of market volatility and help investors chart a path beyond the confines of the 60/40 portfolio. When a more conventional approach to investing is no longer adequate to generate the stable growth and steady cash flows needed, investors are increasingly turning their attention to alternatives.
There are, of course, inherent risks in these securities. If you are thinking of broadening your investment reach into alternatives, you need to understand what you are buying and know how best to include these investments in your overall mix.
Alternatives Are Becoming Mainstream, To Some Extent
Due to the nature of alternative investments, or “alts,” including their potential for complexity, volatility and illiquidity, they are not appropriate for everyone. That’s why their sales are mostly limited to accredited investors and qualified purchasers by the Securities and Exchange Commission (SEC): “financially sophisticated” individuals with a reduced need for the protection provided by regulatory disclosure filings.
Traditionally, given the exorbitantly high minimums one would have to pay to access these established players, alts maintained their exclusivity by typically being limited to institutional investors such as endowments, sovereign wealth funds and pension plans. However, in this new technology-driven paradigm, private fund platforms are offering a way for the financially sophisticated to access these types of funds with reduced minimums relative to buying funds directly—thereby offering individual investors the ability to invest like an institution.
The Need For Institutional Alternative Investments
In 2022, market conditions such as volatility as well as differing global monetary policies created a foundation for alternative investment strategies to grow. They included multi-strategy, macro and CTAs with respect to hedge funds as well as private credit. There was often a widening gap between the best and worst performers, and it was mostly the largest and established firms, those deemed institutional, that outperformed last year. These firms with deep teams, systematic trading infrastructure and robust risk management systems were able to nimbly navigate last year’s treacherous market conditions, while many smaller counterparts, who could be considered emerging managers, fell behind the curve. Over the last few years, smaller hedge funds found more success. However, the changing economic environment has helped larger funds produce greater results and, while there is no guarantee of future performance, the trend could continue in 2023.
‘Smart Money’ Is Leading The Way
Many institutional investors, endowments and ultrahigh net worth individuals have sought to take advantage of the potential upside of alternatives for years. A report from EY shows that 81% of ultrahigh net worth individuals have alternative investments. Another estimate shows that UHNW portfolio allocation to alts was at 50% in 2020. Investing in assets with a low positive correlation, or even negative correlation, is a leading strategy for many institutional and high net worth investors because these tactics can help mitigate some of the volatility of a portfolio. While investing in any alternatives like private funds involves risk and can result in the complete loss of capital, the “smart money” has aimed to benefit from alternatives over time because they have extensive resources to handle the high minimums and administrative requirements typically associated. Meanwhile, the evolving financial services industry has seen a democratization of alternatives, making these securities more mainstream.
Talk with your financial advisor to see if an alternative portfolio approach composed of private funds is appropriate to meet your financial goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.