By Brian Spinelli, CFP®, AIF®, Chair of Investment Committee/Senior Wealth Advisor at Halbert Hargrove
With confidence in traditional portfolio assets waning right now, alternative investments are getting more attention from investors. These investments are not a miracle substitute. But they can generate gains independently from the stock and bond markets, complement your core holdings, and provide a true hedge against risk.
So what are alternative investments?
By definition, these strategies are neither 100% stocks nor bonds. Their approaches and structures vary widely – but typically, alternatives are less liquid than traditional investments. This can play a big role in the returns they deliver. Many large institutional investors use them as part of a diversified portfolio. As a rule, when you’re working with a longer-term investment horizon, taking advantage of the benefits of holding less-liquid alternative instruments can pose less daily portfolio volatility.
Though not an exhaustive list, these are some of key players in the alternatives universe:
Real estate is by far the largest asset class in the world. Owning private real estate yields rental income and can be an effective diversifier to traditional stocks and bonds.
Investing in private companies is a classic alternative play; venture capital is understood as private equity invested in early-stage enterprises. For any type of private equity, careful due diligence is essential to understand the risks taken on.
From metals, to energy resources like oil and gas, to agricultural commodities, this asset class is widely viewed as a hedge against inflation.
Alternative lending focuses on spaces of the market underserved by traditional banking institutions. With private direct debt, you can demand higher rates of return for the risk taken.
Insurance is systemically overpriced due to most people’s strong aversion to loss. With reinsurance, the compensation for taking on a given degree of risk can be attractive income source. Plus, these strategies offer a low correlation with more traditional portfolio assets.
Available only to institutional and qualified (high net worth) investors, hedge funds are actively managed pools of capital. These funds are often misperceived as only following high-risk strategies that aggressively pursue outsized returns – but this asset class offers a range of risk/reward profiles.
More recently, cryptocurrencies have risen in popularity. Two large examples include Bitcoin and Ether. These investments present a unique set of risks. Unlike most other alternatives, they are highly liquid – and, typically, highly volatile.
Every investment comes with risk, but there are ways you can reduce risk with alternatives. One of the safest approaches is to use SEC-registered alternatives funds that require transparency. Also, using alternatives that don’t require long lock-up periods and engage in daily pricing can help reduce some risk. If you’re looking for a stable income stream, core investments in real estate have a track record of providing this more reliably than some of the other alternatives.
At Halbert Hargrove, our approach is always to diversify among many different alternative strategies. The point is to hold investments that are independent of one another – with separate return streams to avoid a concentration of strategies.
Another critical safety consideration is exploring every investment in the context of your current phase of life – your life goals and progress along the way. That’s our starting point. Alternatives are one tool of many that can help you meet your objectives.
For many investors, trying to invest in alternatives on their own hits the double whammy of lack of experience and barriers to access. Compared to publicly traded stocks and bonds, these investments are (typically) not as easy to research – and ongoing due diligence is not a walk in the park either. Alternatives often require high minimum investments. And for many instruments, investors are required to meet certain qualifications.
It’s a lot to consider.
With the many – many – unique risks and complexities posed by this asset class, we believe it makes sense to work with a financial advisor who has experience with alternatives and can assess if they’re appropriate for your portfolio. Working with an advisor can also help with some of the financial barriers to entry. For example, in many cases, required investment minimums can be for our firm as a whole – enabling our clients to participate individually.
Finally, we believe that it’s essential to avoid conflicts of interest. It doesn’t make sense to work with an advisor who’s compensated differently when they use alternatives. We are fee-only here at Halbert Hargrove.
Questions about alternatives? You’ve come to the right place. Contact me or your wealth management team – as always, we’re happy to help.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
Alternative Investments are a diverse class of investments. The risks vary greatly. Certain Alternative Investments are very speculative and highly risky and are only appropriate for those that understand and are willing to assume the risks. Investors in Alternative Investments are provided with documents with additional information from the issuer, including the risks involved in that particular investment. Investors should read those documents carefully before investing.