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Written by Michael Gossie, Editor in Chief
The rise of non-traditional opportunities has many investors redirecting their savings into alternative investments
Think of today’s buzzwords: Cryptocurrency, blockchain, cannabis, FinTech, to name a few.
How are companies that are looking to make an impact in these market sectors being funded? In many instances, by accredited investors and high-networth individuals.
“Savvy investors are looking at alternatives for a variety of structural reasons that run the gamut from having a rare opportunity to be at the early stages of emerging and rapidly expanding industries to regaining the access that retail investors once enjoyed to high-growth deals — access that has largely been usurped and gated by the professional investor class that has expanded signifi cantly over the last 20-30 years,” says Mark Vange, CEO of Scottsdale-based TokenIQ, the first Initial Coin Offering (ICO) agency and consulting services for blockchain and non-blockchain companies.
“In order for alternatives to be more mainstream, it’s critical to make it easy to vet options and invest into them.”
‑J.P. Dahdah, CEO of Vantage Alternative Custody Services
Interest in alternative investments — or alts — is on the rise. A report from global research and consulting firm Cerulli Associates
showed U.S. wealth advisors’ mean allocations to alternatives jumped from 5.7 percent in 2016 to 7.2 percent of their total assets under management in 2017. And there’s a reason there is an increased interest in alts: everyone wants to be a part of the next Google, Apple or Amazon.
“Like automobiles, plastics, electronics, mobile phones and the Internet have done, several emerging industries are poised to transform the way we work and live,” Vange says. “Cannabis, artificial intelligence, distributed ledgers and blockchain, as well as more recently emerging fields like augmented reality, electroceuticals and commercial space exploration all represent possible future trillion-dollar opportunities in which savvy future-focused investors want to gain a foothold before they become mainstream and are occupied by incumbent interests.”
WHERE TO START?
If you’re a conventional investor who has historically added only stocks and bonds to your portfolio, the word “alternative”
likely conjures images of flannel-wearing rockers or people who live a nontraditional lifestyle. An alternative investment is an
asset that is not one of the conventional investment types, such as stocks, bonds and cash.
“I do not actually view the ‘alternative’ investment space as alternative, in much the same way that ‘alternative music’ is actually mainstream music for many people of my generation,” says Jared B. Black, managing partner of Black Law Group. “Would anyone ever call Nirvana or Wilco alternative bands at this juncture? One reason alternative investing is not more mainstream is that generally, investment sponsors are limited to offering their opportunity to ‘accredited investors’ — generally speaking, a person with positive net worth of $1 million.”
Experts say most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals
because of the complex natures and limited regulations of the investments.
“Investing in alternatives is still perceived as a complicated process, which prevents many investors from taking the first step,” says J.P. Dahdah, CEO of Vantage Alternative Custody Services, the only alternative asset custodial company in Arizona. “In order for alternatives to be more mainstream, it’s critical to make it easy to vet options and invest into them.”
Experts say it’s also critical to today’s economic environment for investors to utilize alternatives to diversify their portfolios.
When a bull market weans and traditional markets are volatile, having an allocation to alternative funds and direct investment
access to alternatives — anything other than stocks and bonds — helps to cushion a portfolio and offer diversification strategies for
reducing risk and attaining attractive returns in capital and fixed income.
“Many accredited investors have heard of these opportunities, but didn’t know how to gain access,” says Corey Bird, principal and
wealth manager at Rowland Carmichael. “As an advisor, our job is to review client goals and diversify to achieve their legacy now
and for future generations.”
In order to make investing in alternatives more understandable, Dahdah created the ALTS Forum — a collaborative concept and acronym meaning “Always Looking To Solve” — to play on the word “alternatives.” ALTS Forum was created to help with investor education and forge communication for the alternative community. ALTS Forum is comprised of financial services executives that represent a 360-degree view
of the ALTS investing ecosystem and help build strategies for investor education on portfolio diversification to incorporate the
changing investment landscape.
“The biggest obstacle facing the alternative investment industry is the lack of awareness that alternative assets beyond the stock market can be purchased with tax-favored retirement plans,” Dahdah says. “Collectively, there are over $25 trillion dollars held within U.S. retirement accounts, but less than 2 percent of those dollars are invested in alternatives. Retirement accounts represent American’s largest source of investable assets, and unfortunately, we’ve all been incorrectly led to believe that our investment options are limited to Wall Street-based publicly traded securities.”
Dahdah says the ALTS Forum educates and empowers investors through local workshops, written content and video blogs that help them connect the dots that a self-directed IRA can be utilized to fund their preferred alternative investment strategies.
“Investors don’t always know where to get started with their alternative investment strategy,” says Peter Anadranistakis, president and co-founder of Oxygen Hospitality Group. “It’s important to educate and make the investment process as seamless as possible. Working with an ecosystem of financial experts is one way to gain awareness and ease the process. By process, I mean from a RIA or investor vetting the upside potentials and risks of a sponsor’s opportunity, to recommending potential investments that meet the criteria for the investor’s portfolio to the custodial company selected to invest with retirement funds through legal and compliance. What I’ve witnessed throughout my years in the industry is once an investor takes that first step, he or she realizes there are a myriad of alternative opportunities available outside Wall Street.”
Before you decide to cash in your stock and take a sip of the alts Kool-Aid, remember that some alternative asset opportunities are
limited to accredited investors — those with a positive net worth of $1 million — only.
“Historically, the largest alternative investment allocations have been directed into real estate-based offerings,” Dahdah says. “However, cryptocurrencies, peer-to-peer lending, FinTech ventures, cannabis and blockchain-based private funds have emerged as the hottest alternative asset categories.”
In anticipation of a stock market correction, Dahdah says many investors are choosing non-traditional alternatives as a way of increasing their diversification into assets that are non-correlated to the stock market and can provide more stability to their overall
portfolio strategy. One of the common objections to investing in alternatives is their tendency to be illiquid positions with holding
periods of three to five years. Savvy investors are learning that self-directed IRAs serve as the perfect vehicle to buy illiquid
“Placing illiquid assets into a long-term IRA account is a win-win solution with the added bonus of the tax advantages offered by retirement plans,” Dahdah says. “All publicly traded securities start as private companies. Amazon, Facebook and Tesla are examples of popular traditional stocks that were originally private companies in which a select number of lucky early investors got in and made a fortune. Therefore, having access to these opportunities at the ground level early on, accredited investors can experience impressive investment returns throughout the private market growth cycle.”
Before you dive into investing in that start-up that you’re convinced will be the next Google, remember that alternatives do come with many potential obstacles.
“From our view, clients underestimate some of the potential challenges in these emerging areas,” Bird says. “Regulation is one of the greatest concerns that will eventually catch up to the operators in the various spaces. There is also a large potential for fraud. The investor will need to conduct due diligence and really understand the companies and people they are investing with, and to keep in place all the normal safeguards to eliminate intended or unintended mismanagement. Investors today seem to be focused on cash flow that is either spendable or able to be reinvested in new opportunities as market cycles change. As the market continues its historic run, some investors are looking to reduce correlation to the stock market and use alternatives to implement estate planning.”
Black says successful alternative-oriented investors will do what they have learned to do and always do best — seek out superior
risk-adjusted returns in spaces that they understand, know and can appreciate — and do it continuously and with consistency.
“Many Americans are homeowners and already own real estate and many more own commercial real estate or interests in real estate, and those investors have been benefited by the positive economy of the past decade in very identifiable and easy to understand ways,” Black says. “So, in many respects, real estate investing is a ‘first base’ alternative investment space for many investors. As our historically low interest rate environment continues to hum along, I suspect that alternative investing utilizing leverage — such as commercial real estate, multifamily and similar spaces — will continue to be bright spots in the investing marketplace. One thing I have learned from experience
is to try and hit singles. Just singles. But try and hit a few every month, every week, or every day.”