As an investor, you are likely familiar with stocks and bonds, as traditional investment options. You may also have heard the term alternative investments, or “Alts”. By way of example, one of the most common “Alts” is real estate, which has been a popular asset class for many decades, and still is. The range of alternative investment opportunities has grown significantly in recent years, and this has prompted investors, and their advisors, to reconsider their role in well crafted, well diversified investment portfolios.
This expanded range of alternative investment opportunities includes “hard assets” (beyond real estate) such as commercial aircraft, maritime assets, rail cars, energy farms, and more. It also includes things like non-bank lending platforms, venture capital, and other private ways to deploy capital to the businesses that are seeking it.
In recent years, registered investment advisors (RIAs) have been increasing their allocations to non-traditional investments. RIAs, who are fiduciaries and are required to act in the best interest of their clients, have been turning to alternative investments as a way to diversify portfolios and potentially generate higher returns. In the past, many alternative investments were only made available to institutional investors. However, in recent years, new vehicles have emerged that allow individuals and their advisors to invest in them directly, thereby helping to fuel the growth.
Why Alternative Investments?
One reason for the increase in these investments is the low-interest rate environment we have been experiencing compared with the past 30-40 years. With traditional “fixed income” investments like bonds yielding low returns, RIAs have been seeking out other options to provide current cash income for their clients.
Another reason is the potential for higher returns from non-traditional investments. While some alternative investments may carry more risk, they can also offer the opportunity for higher returns in certain market conditions. Further, and importantly, the risk profile of many alternative investments is not correlated with the public equity and debt markets, creating a very effective diversification strategy, and thereby reducing overall portfolio risk.
There are several types of non-traditional investments that RIAs have been adding to portfolios. One popular option is real estate, which can provide a steady stream of income through rental payments. Private equity or “PE”, which involves equity investments (common stock or preferred stock) in private companies, has also been attractive to RIAs as a way to potentially generate higher returns. Venture capital or “VC”, which is like private equity, but typically involves equity investments in earlier stage companies, is another popular, albeit risky class of alternative investments. It should be noted that most of these investments are made through fund structures, which can be heavily laden with fees.
Other alternative investments, such as those offered by access, involve investing in different types of “hard assets”. Transportation assets like rail cars, ships, containers, and commercial aircraft, are examples of “hard assets” that are investable, but have historically only been available to institutional investors. access has the expertise to bring these investment opportunities to individuals (and their advisors). Using commercial aircraft as an example, these are key elements for the investment rationale:
- Diversification: Investing in commercial aircraft can provide diversification for an investment portfolio, as it is a less commonly used asset class compared to stocks, bonds, and real estate.
- Potential for steady returns: Commercial aircraft can generate steady returns through lease rentals, which can provide a reliable source of income for investors. Further, there is potential for equity-like upside upon disposition of the asset.
- Inflation hedge: The value of aircraft tends to increase over time due to inflation, making it a potential hedge against rising prices.
- Limited correlation with traditional financial markets: The performance of commercial aircraft investments is not normally correlated with the performance of traditional financial markets.
- Professional management: Investing in commercial aircraft through a fund or other managed vehicle can provide access to professional management and the benefits of economies of scale.
Additionally, it’s important for RIAs to perform due diligence on the specific alternative investments they are considering, as well as on the managers they work with to source and manage these investments. This includes understanding the investment strategy, risk profile, and fees associated with the investment. It’s also important to consider the potential liquidity of alternative investments, as some may be more difficult to sell in a pinch than traditional investments like stocks and bonds. At access, we serve as fiduciaries, which can offer RIAs some comfort as to the care with which our investments are originated, structured and managed.
RIAs should work with their clients to determine an appropriate allocation to alternative investments based on the clients’ overall financial goals and risk tolerance. It’s also important to regularly review and rebalance portfolios to ensure the allocation to alternative investments is still in line with the clients’ goals and risk tolerance.
If you are considering alternative investments as a way to diversify your portfolio and potentially generate higher returns, it’s important to work with a financial advisor or RIA who is experienced in these types of investments. They can help you understand the risks and potential rewards and determine if alternative investments are appropriate for your portfolio.