Alternative investing is about to have its day — and we feel it’s going to be a long and sunny one. Interest in alternative platforms has been growing in recent years, thanks to the rising popularity of the fintech sector. The 100 largest alternative investment firms currently control $3.6 trillion worth of assets, and that number will grow as investors continue to seek nontraditional options for their portfolios. Last week, SoftBank announced it is buying Fortress Investment Group for more than $3 billion, confirming alternative investments are moving toward the mainstream through the use of technology.
Although the Dow Jones industrial average recently surpassed 20,000 for the first time in history, many investors question whether the bullish market will continue. Despite a decent S&P showing, many hedge funds underperformed in 2016. In turn, dissatisfied investors pulled $28 billion from hedge funds last year, a signal of unhappiness with the current situation.
Moreover, new political administrations always spark anxiety among investors, and right now, they’re getting mixed signals on trade policy changes and business tax reforms. President Donald Trump’s “Made in America” promises could radically affect overall economic activity, and nervous investors are wondering how it will all play out.
Given the uncertainty concerning how traditional investments will fare in the next several years, we’ve observed that certain investors are seeking fixed-income options backed by assets. Alternative investing platforms offer a range of such products.
From our perspective, three main catalysts have driven the recent uptick in alternative investing. Here are the forces causing the shift — and thoughts on how investors can take advantage of these changes:
1. Lack of trust in the stock market:
The Great Recession created massive losses in the stock market, and it took at least five years for the market to recover from the lows of 2008. Investors suffered heavy losses and saw their retirement savings and children’s college funds jeopardized.
As consumers worried whether they’d ever regain their money, they saw hedge fund managers escape the crisis relatively unscathed by taking advantage of the situation. This left retail investors wondering if they could ever come out on top or whether it was really just a trader’s market. In our view, what investors should do is look beyond their exchange-traded funds and mutual fund portfolios and look toward more transparent and intuitive options alternative platforms may offer.
Peer-to-peer lending, specialty finance, and real estate all present great potential opportunities to diversify. Areas such as litigation finance and commercial loans were once exclusively available to institutions and big money investors, but retail consumers now have a chance to get in on them as well.
2. Almost no value in savings accounts:
Interest rates on savings accounts have declined for more than two decades, and the drop sharpened in the last 10 years. Interest rates for most CDs are below 0.75 percent, and the Federal Deposit Insurance Corporation reported that the national average for interest on savings accounts was 0.06 percent in 2016. For most people, this means a 2 to 3 percent yearly loss on money in their savings accounts due to inflation.
Such low interest rates tend to exacerbate the skepticism people feel toward traditional financial institutions. They want more stable investments that will generate yield. That’s why Lon Morton, CEO of Morton Capital Management, advises clients to invest heavily in alternatives, including real estate and catastrophe bonds.
Alternative investments are generally less dependent on the stock market than standard stocks and bonds, so they may offer better risk return profiles. The sheer range of alternative products helps enable investors to customize their portfolios according to their circumstances, goals, and values.
3. Opportunities created by the JOBS Act:
In 2012, the Jumpstart Our Business Startups (JOBS) Act was passed with bipartisan support and signed by former U.S. president Barack Obama. This eased many regulations within the U.S. securities industry in an effort to promote small-business funding, creating unprecedented opportunities for retail investors.
Prior to the JOBS Act, specifically Title III individuals had to earn $200,000 a year or have a net worth of $1 million to qualify as accredited investors. Anyone who didn’t meet those numbers was barred from taking equity in private enterprises in exchange for investments.
However, the JOBS Act made it possible for retail investors from a much broader income range to back private companies and participate in previously exclusive opportunities. Peer-to-peer platforms such as Lending Club and several crowdfunding organizations took advantage of the new regulations and invited average consumers to invest in consumer debt, small business lending, real estate, and specialty finance.
The latter includes the aforementioned litigation finance, or legal pre-settlement financing, which acts as a cash advance against the anticipated settlement of a personal injury lawsuit. Although these advances are sometimes called “lawsuit loans,” in reality, the plaintiffs are not responsible for repaying the litigation finance company if they lose. Litigation finance firms are meticulous in their risk assessments for these cases, as they know they can’t recoup those advances and will only see a return if their clients win.
In this time of political commotion and uncertainty, financial advisors and planners would do well to explore such alternative investments. They can use them to create differentiated products that will thrill their clients when they see the favorable returns. Instead of having to defend the drop in clients’ portfolios every time the stock market acts up, they’ll be receiving praise for their foresight and savvy.
Alternative investments offer a bright spot in an otherwise hazy economic future. The administration’s effect on business remains to be seen, and forward-thinking investors will seek opportunities to disentangle themselves from market volatility. New products and platforms are democratizing investing, providing smart investment strategies no matter which party is in office. Milind Mehere is a passionate serial entrepreneur currently at the helm of YieldStreet as CEO and founder. YieldStreet uses technology, data, and investment management to empower financial independence for all. Milind has been fortunate to work for industry-defining companies, and he has successfully built and scaled three businesses, one of which, Yodle, was acquired by Web.com for $342 million in 2016. The information set forth herein is not intended to be, and should not be construed as, investment advice.
Posted by: The Trust Advisor