For decades, alternative investments eluded mainstream investors – leaving the spoils to the rich and blue-blooded. The alternative investments the rich were most interested in – private company investments (i.e., private equity), venture capital, and commercial real estate – were largely restricted to the wealthy and connected.
This was mainly due to the strict prohibitions against advertising and general solicitation and minimum income and net worth investor qualification requirements applicable to unregistered securities offerings (i.e., private placements).
While historically the exclusive sandbox of the rich, alternative investments are showing signs of going mainstream. Alternative investments are expected to grow from $13.9 trillion in 2020 to $21.1 trillion in 2025. medium.com (2020). Mainstream investors have historically been scared away by the financial press, who have always sounded their alarms over the riskiness of alternative investments.
While it’s taken some time for the mainstream to adopt alternative investments slowly, smart investors have always been hooked. Our current volatile economic environment – riddled with inflation, increasing interest rates, and high energy prices – sends many mainstream investors to the traditional investment exits. And while it’s taken these investors a crisis to seek alternatives to Wall Street, alternative investments have always had the attention of savvy investors.
While conventional Wall Street wisdom continues to tout the traditional 60/40 allocation strategy, smart investors know better to lean heavily on alternative investments. Some of the wealthiest and savviest investors allocate more than 50% of their portfolios to alternative investments such as private equity and real estate.
Why the attraction to alternatives?
Despite the Wall Street narrative surrounding the riskiness of alternative investments, smart investors know better – drawn to the asset class because of the potential to enhance the risk/reward characteristics of an alternative-skewed portfolio over a traditional one.
Smart investors have bucked the classic risk/reward paradigm by discovering that partnering with the right team of experts in private equity or real estate investment can enhance returns and mitigate them.
Besides better risk-adjusted returns, there are other reasons smart investors prefer alternative investments – reasons mainstream investors are just now discovering in the current economic environment. And of all the different types of alternative investments, smart investors have a particular affinity for private equity and real estate.
Here’s why:
- Low Volatility.
- Inflation-insulated.
- Cash flow.
- Appreciation.
- Low Volatility.
- Tax Benefits.
- Opportunity to leverage time, experience, infrastructure, and knowledge of seasoned experts.
- True diversification across multiple assets, investment segments, and geographic locations to shield income against recessions.
Anyone can be a smart investor. It takes reassessing our investment strategies and deciding whether what we’ve done in the past and what we continue to do in the present serve our investment objectives.
Next time you go into introspection mode regarding your investment strategy, ask yourself why smart investors invest in alternatives and whether it now makes sense for you to plunge into the alternative waters.