What Are Alternative Investments?
Alternative investments are anything other than stocks and bonds, arbitrage, long and short selling and the like. Generally speaking, alternative investments typically involve private assets such as private equity, private credit, infrastructure and private real estate.
The nature of these types of investments has traditionally restricted them to the ultra wealthy and institutions because they are unregulated by the SEC. However, they are now being made available to less well-heeled investors because the profit potential is significant and it’s increasingly being looked upon as unfair to make them the sole domain of the 1%.
The Rise and Future of Alternative Investments
A 2020 Connection Capital survey found 87% of private investors are looking seriously at including alternative investments as an aspect of their portfolios over the coming year. Claire Madden, managing partner at Connection Capital, says: “We are seeing clear buy signals from private capital for alternative assets and relevant strategies despite – or because of – the wider market turmoil.”
Alternative investments tend to be insulated against market volatility and 2020 was one of the most volatile years in recent history. However, gold for example, has proven to hold its value quite well. Real estate has also been a solid performer — depending upon its location. On the other hand, equities are still quite expensive and its forecasts aren’t exactly setting the world on fire. Low interest rates have been depressing returns and inflation continues to be a very real concern.
Meanwhile, technological advancements have made alternative investments easier to understand, as well as reduced their investment thresholds. These factors bode well for the growth of alternative investments in 2022.
Trend Toward Tailored Portfolios
More and more investors are looking to ensure their capital is used to support their beliefs. This has led to a number of non-financial factors being taken into consideration when shaping portfolios. Naturally, investors are still looking to grow their wealth, but they also want to feel good about doing so.
This has brought into play an increased emphasis on Environmental, Social and Governance (ESG) factors when investing. As a result, portfolios are increasingly being tailored to the moral values of investors. This, in turn, brings about more interest in alternative investments such as legal finance, decarbonization, real estate, art, decarbonization, equity crowdfunding and peer-2-peer lending.
Ultimately, portfolio tailoring, particularly when including alternative investments, can give you the ability to select a mix of asset classes reflective of your sensibilities, as well as your tolerance for risk, your goals, your time horizon — and of course, tax considerations.
The Top Alternative Trends for 2022
Legal Finance
Supplying financial backing for litigants and/or their law firms is showing considerable growth as an investment strategy. There are currently 40 firms in litigation financing in the United States. This is up from six such companies that were in existence in 2008, according to CNBC.
Some $9.5 billion in assets are under management in this area and the majority of these companies are privately held. It’s important to note however, these investments tend to be all or nothing. You can score big if the team you back wins. You’ll go home empty-handed if they lose.
With that said, the median annualized return is 52% after fees and expenses.
Decarbonization
According to Forbes, there exists a $100 Trillion investment opportunity in climate transformation. A report by the International Energy Agency has declared investing in new fossil fuel supply is incompatible with global climate goals. This, in turn, has identified what some analysts are calling the greatest commercial opportunity of all time.
Renewables are expected to deliver 90% of power generation by 2050, with wind and solar comprising 70% of that volume. This will bring about a need for a great deal of investment in added capacity, modernizing the energy grid and storing power for when the sun isn’t shining and the wind isn’t blowing.
Real Estate
A star player on every team of alternative investments, real estate usually performs well regardless of what else is going on in the world. Safer and more predictable than the stock market, certain factors that work against the market actually bolster real estate’s potential.
Inflation is a good example.
While it tends to eat away at the value of money, it increases the value of real estate holdings. While stocks often struggle in an inflationary environment like the one we are currently experiencing, property values and rent tend to increase with inflation.
This makes real estate a solid buffer against inflationary losses.
Art
An industry worth more than $3 Trillion, with an annual turnover of $30 Billion, art is absolutely a worthwhile asset class. Demand is increasing and supply is low, which means prices are on the rise.
Moreover, these qualities hold true, even during economic downturns.
You can lower both the cost and the risk of investing in art through fractional ownership. Firms like Yieldstreet offer fractional investment in physical artworks by blue chip, mid-career and emerging artists. They also provide investors with the opportunity to invest in loans backed by artworks that can generate monthly income.
Equity Crowdfunding
Affording the average investor an opportunity to back startups as well as young private businesses that are already going concerns, equity crowdfunding has emerged as a vibrant asset class in alternative investing. Recent changes in the law have made equity crowdfunding accessible to ordinary individuals.
With equity crowdfunding, investors can get an ownership stake proportional to the amount of their investment in the companies they back. And, while the SEC doesn’t regulate this asset class, per se, the Commission has mandated limitations on the amount of investment an individual can make over a 12-month period in order to help to protect the “little guy”.
Peer-to-Peer Lending
A compound annual growth rate of 31% is projected for the P2P market over the next four years. This is according to the Peer to Peer (P2P) Lending Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026, published by Research and Markets.
The P2P lending market is composed of borrowers looking for unsecured personal, business or educational loans and investors pursuing higher rates of return than they can get from traditional assets. Transactions are facilitated over the internet, with P2P lending platforms matching borrowers to lenders for nominal fees.
This enables borrowers to get loans at better rates and lenders to enjoy higher returns. Of course, as is typical in the investment world, the higher the potential reward, the more significant the risk. Lending platforms minimize this to a degree by employing data science and artificial intelligence to build and manage portfolios. The goal is to deliver returns that are both high and stable.
Crypto
Massive changes have taken place in the cryptocurrency market over the past decade. What was once considered an interesting digital experiment has evolved into a bonafide asset class. Along with this newfound status has come a number of different ways in which to invest in it. With mass adoption over the past two years and more expected growth, it’s safe to say crypto is an asset class. Although it has taken a beating over the past few months we expect this asset class is here to stay and a great time to get exposure to your portfolio. More mainstream adoption is on the way through real life uses but just steer clear of most coins as they have no utility and will be worth 0.
