Alternative Investments or “Alts” are an asset class that are exclusive to Qualified Purchasers and Accredited Investors. Within the Alts Asset class there are many different types of funds and direct investment opportunities with varying expected returns and risk. Because of their complex nature and lack of regulation, these types of assets are made for sophisticated investors and are not suitable nor available to retail investors. In most cases, they are designed to have a low correlation to retail investment options like stocks and bonds. Additionally, they often employ long term strategies to achieve superior results and can require lengthy lock up periods, making the investments less liquid.
Some Major types of Alts are:
Private Equity: Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet. Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments in order to ensure a turnaround for distressed companies or to enable liquidity events such as an initial public offering (IPO) or a sale to a public company. Private equity as an asset class has produced some of the highest annual net returns in the alternative asset class.
Hedge Funds: Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). It is important to note that hedge funds are generally only accessible to accredited investors as they require less SEC regulations than other funds. Each hedge fund is constructed to take advantage of certain identifiable market opportunities. Hedge funds use different investment strategies and thus are often classified according to investment style. There is substantial diversity in risk attributes and investments among styles. Investments in hedge funds are illiquid as they often require investors to keep their money in the fund for at least one year, a time known as the lock-up period. Withdrawals may also only happen at certain intervals such as quarterly or bi-annually.
Private Credit: Private Credit Funds focus their lending on middle-market and private companies who need capital infusions to fund expansion. They produce superior results when they successfully select strong firms to lend to and generate higher interest payments than what is available to retail investors in the corporate or municipal bond market. Direct lending funds negotiate their own loan structures and work closely with management to help the business meet its goals. Portfolio companies generally have an EBITDA between $5 million and $75 million dollars.
Venture Capital & Growth Equity: Venture Capital funds partner with entrepreneurs around the world to build revolutionary businesses. The best Venture Capital funds have proprietary sourcing techniques and the expertise to conduct due diligence on early stage companies. These funds become partners with the management teams and seek long term relationships with their portfolio even after they go public.
Real Estate: Direct Investment and professionally managed real estate funds seek to achieve non-correlated returns by investing or lending to access various property types, management styles, and many sectors/geographies.
Commodities: Professionally managed commodities strategies can be an efficient way to gain broad commodity exposure and achieve returns in any type of equity market. They can be a strong hedge for inflation, geopolitical events, and equity markets. Managers utilize rigorous fundamental and technical approaches to identify opportunities for positive returns.
Collectables: Art, Wire, Coins, Stamps
Sophisticated investors prefer these types of assets over traditional retail options because of their potential for superior returns.
Alternative Investments are not registered products and are only available to Qualified Purchasers. Due to the long term nature of the strategies coupled with the stringent wealth requirements, we recommend utilizing Private Placement Life Insurance and Private Placement Variable Annuities as the investment vehicle for Alternatives to avoid major tax implications that accompany the asset class.
Alternative investments involve risks that may not be suitable for all investors. These risks include (but are not limited to), the possibility that the investment may not be liquid, principal return and/or interest rate risk. Higher fees associated with alternative investments may offset any potential gains. Investors should consider the tax consequences, costs and fees associated with these products before investing.