There are reasons to seek alternative investments today.
With a volatile stock market and interest rates being ultra-low, people may seek out alternative investments. Alternative assets differ from traditional publicly traded stocks and bonds. Some alternative investments such as gold are easily accessible to all buyers, but some are available only to accredited investors, such as high-net-worth individuals or brokers. Paul de Sousa, senior vice president at Sightline Wealth Management, says alternatives belong in an investor’s portfolio as they can produce higher returns than traditional assets; however, they are much less liquid, so investors need to tie up their money for a set amount of time. That means these investments often don’t have a daily net asset value, he says. Here are seven alternative investment ideas to consider.
De Sousa says owning gold bullion should be a permanent part of an investor’s portfolio to act as an insurance policy against traditional market swings. “Physical gold represents real money because it can’t be created out of thin air,” he says. Gold is also an inflation hedge because it’s a store of value, rising as prices rise. Although inflation is not a serious concern now, he says with the amount of stimulus from central banks because of the pandemic, inflation may be a problem down the road. De Sousa adds that by always having a gold allocation, buyers can benefit from the metal’s swift price rises, which can otherwise be difficult to capture during a rally. He also prefers owning physical gold rather than gold-backed exchange-traded funds.
Cryptocurrencies are still a relatively new asset class, but Steve Kurz, head of asset management at Galaxy Digital, says they have established themselves as an alternative to stocks. In the past several years, digital currencies have shown little to no correlation with traditional assets. Of the different cryptocurrencies around, Bitcoin has the longest track record and best brand, he says. From a market-structure perspective, “it also has the most robust reputational infrastructure, institutional infrastructure … and regulatory framework around it,” says Kurz. Bitcoin is also seen as a kind of “digital gold,” holding a similar type of value to the precious metal.
Real estate investing has been a traditional alternative asset to stocks and bonds for many investors, but Dunkin Allison, director of portfolio management at Delegate Advisors, says investors who are getting into real estate investing now need to keep a few factors in mind. “Real estate is probably going to be one of the broader asset classes that sees the most dislocation because of this pandemic,” he says. Areas such as retail and commercial office space are likely to be challenged for a while, he says. Investors in real estate should keep an eye on demographic trends as they search out investment opportunities.
Although gold is considered a commodity, de Sousa says there’s a distinction between gold bullion, which has a historical standing as money, and other commodities. These other commodities, such as crude oil and copper, can be considered bellwethers on the economy’s health because they are used so often in industrial applications. Agricultural commodities such as grains or coffee can also give insight into consumer demand. Commodities as a whole have been used as leading indicators of inflation because they can respond quickly to overall increases in demand. Most commodities are traded on futures markets, but there are some ETFs now that follow the futures markets, including the Invesco DB Commodity Index Tracking Fund (ticker: DBC).
Special purpose acquisition companies (SPACs), also known as blank-check companies, are enjoying a resurgence as some high-profile managers are in the space, de Sousa says. SPACs are created specifically to buy existing companies and raise capital through an initial public offering. Accredited investors put money in a SPAC blindly and trust the manager to find opportunities to allocate that capital. Buyers can hold on to their investment in hopes it will appreciate, or they can trade the seed warrants they receive with their investments. Those warrants can become tradable a few weeks later, he says. When the manager announces an acquisition, the buyer can choose to invest in the company or they can get their money back, including interest earned.
Private debt is a loan made to private companies with collateral of some type backing the loan, de Sousa says. He notes these types of transactions have little correlation to public markets. Private debt markets are illiquid; however, he adds that accredited investors can find loan terms for their desired duration, which lets them stagger the length of the loan and payout. That illiquidity comes with attractive yields of anywhere from 6% to 10%, much higher than the 10-year U.S. Treasury yield of around 0.7%. He says he invests no more than about 30% of clients’ money that won’t be needed immediately in private debt. There are several types of private debt, such as distressed credit, mezzanine and other debt strategies — all with varying degrees of risk.
Direct lending is a type of private debt. Companies receive loans directly from accredited investors, rather than banks or through private equity. Chris Battifarano, chief investment officer of FineMark National Bank & Trust, says there are a lot of opportunities in this space, particularly lending to smaller health care companies that are on the precipice of growth and looking to raise capital. Rather than giving up equity to investors, these companies look to borrow on a short-term basis. These loans are generally for the short term, maybe two years, he says. Investors who are interested in direct lending should be high in the capital structure so they are among the first in line in case of defaults. Loans can be securitized through a royalty stream on the product or with traditional collateral such as equipment or real estate, he says.
Seven alternative investment ideas:
— Real estate
— Private debt
— Direct lending
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7 Alternative Investments That Might Fit Your Portfolio originally appeared on usnews.com
Update 10/09/20: This article was published on a previous date and has been updated with new information.