Considerations When Investing in Alternative Assets

By Alexandria | Hightower on June 13, 2023

For investors looking to diversify their portfolios, alternative assets may be an option worth considering. There are many investment options available outside of the more conventional asset classes like stocks and bonds, and they may be able to add a different element to your existing allocation. Alternative investments can include everything from real estate to private equity. To help you learn more about alternatives, here is a primer on what you need to know before you explore this asset class.

What Are Alternative Investments?

Alternative investments cover a broad range of assets that are “alternatives” to traditional options like stocks, bonds, and cash. This can include real estate, hedge funds, gold, and even a collection of rare objects, such as priceless artwork.

Alternative investments are often less correlated with stocks and bonds and for this reason, they can be helpful in diversifying your portfolio.

Historically, many types of alternative assets were limited to institutional investors accredited by the Securities and Exchange Commission (SEC) and high-net-worth individuals. To qualify as an accredited investor, you must either have had an annual income of at least $200,000 for the last two years or demonstrate “defined measures of professional knowledge, experience or certification” in the eyes of the SEC.¹

Today, however, there are an increasing number of alternative investment opportunities that are available to a more diverse group of investors.

Potential Benefits of Alternative Investing

As with any investment, alternative assets might not always be right for you, and you must only invest according to your risk tolerance. With that said, there are several potential benefits including:

• Reduce Volatility: The stock market is notoriously unpredictable, even during times of economic growth. By adding these assets to your portfolio, you may be able to reduce your overall risk when the stock market drops significantly.
• Increase Returns: Traditional investments are often thought of as a safe bet because they have historically grown – even if slowly – over time. However, there are many alternative assets that offer a higher rate of return, but often with greater risk. Private Credit strategies, for example, move in lockstep with rising interest rates, providing a compelling opportunity when bonds are looking lackluster.
• Hedge Against Inflation: Certain alternative assets rise in value with consumer costs. Assets that are generally effective in hedging inflation risk include: commodity futures such as oil, electricity, grain, beef and other goods; precious metals like gold; and real estate.

Potential Drawbacks of Alternative Investing

Despite the possible advantages of alternative investments, there are a few pitfalls that you should consider before making a decision.

• High Up-Front Investment: Unfortunately, many alternative assets are not structured to be accessible to the average investor. Oftentimes, they require a high minimum investment along with additional fees that can be prohibitively expensive. They generally also have higher fees than a mutual fund, for example.
• Valuation Difficulties: Because alternative assets aren’t usually traded on the public market, getting an accurate valuation can be challenging. This leads to widely varying appraisals that can pose a great risk in some instances.
• Relatively Illiquid: Alternative investments tend to be fairly difficult to liquidate compared to conventional assets as they are not traded on a public market. As such, it is often up to the seller to find potential buyers.

• Lack of Regulation: Most alternative investments are not regulated by the SEC and, therefore, have minimal public regulatory filings. As a result, investors may have a more difficult time gathering information on alternative assets.
• Potentially Greater Risks: While some alternatives may offer higher returns, they often come with increased risk due to their often complex nature and the potential to be highly leveraged.

Getting Started with Alternative Investments

While alternative assets can be highly beneficial to many investors, navigating this asset class can be complicated, and you may want a guide along the way. Talk to a financial advisor to learn if alternative investing makes sense within your portfolio.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.

Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid and are not required to provide periodic pricing or valuation information to investors and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.

Endnotes

¹ “Press Release: SEC Modernizes the Accredited Investor Definition.” U.S. Securities and Exchange Commission, August 26, 2020.