The world of investing has come a long way since the days of buying and holding stocks and bonds. With the advent of technology and the globalization of markets, investors have more choices than ever. Once reserved for the ultra-wealthy, alternative investment strategies are becoming increasingly accessible to retail investors. In this article, we’ll explore the new frontier of investing and how alternative strategies are reshaping the industry.
Alternative investments encompass a wide range of assets beyond traditional stocks and bonds. They include private equity, hedge funds, real estate, commodities, and cryptocurrencies. These assets are generally less liquid and more complex than traditional investments, but they offer the potential for higher returns and diversification benefits.
Factors Driving Alt Adaptation
One of the main drivers of the growth of alternative investments has been the low-interest rate environment and high volatility of the past decade. When interest rates at were historic lows, investors were forced to seek out alternative sources of income. Private equity and real estate, for example, tend to offer higher yields than traditional fixed-income investments.
Another factor driving the growth of alternative investments is the increasing demand for diversification, as explained on BlackRock. Traditional portfolios consisting of stocks and bonds may not provide sufficient diversification, particularly during market stress. Alternative investments, on the other hand, tend to have low correlations with traditional assets and can provide valuable diversification benefits. The cost is usually an increase in liquidity, but that is also one factor that insulates you from the risk of the stock market risk.
The rise of technology has also played a significant role in the growth of alternative investments. Platforms such as crowdfunding and peer-to-peer lending have made it easier for investors to access alternative assets. For example, investors can now invest in real estate or private equity deals with just a few clicks of a button without the need for a significant minimum investment.
Perhaps the most significant development in the alternative investment space has been the democratization of access. In the past, alternative investments were generally only available to ultra-high-net-worth individuals and institutional investors. But today, retail investors can access many alternative investments through publicly traded funds and ETFs. If the investor is accredited, they may also have access to true private alternative investments that are not exposed to the stock market.
Challenges to Overcome
The growth of alternative investments has been challenging, however. One of the biggest challenges has been more transparency and liquidity in some alternative assets. Unlike publicly traded stocks and bonds, many alternative assets are illiquid and may not have readily available market prices. Illiquidity can make it difficult for investors to determine the actual value of their investments and can lead to price volatility.
Another challenge has been the complexity of some alternative investments. Private equity and hedge funds, for example, can be highly complex and may require significant due diligence on the part of investors. Retail investors may need more expertise or resources to evaluate these investments properly, which can increase the risk of investment losses.
Regulatory challenges have also been a hurdle for some alternative investments. Many alternative investments are subject to less stringent regulatory oversight than traditional investments, which can increase the risk of fraud or other misconduct. Regulators have been working to address these issues, but investors should know the potential risks when investing in alternative assets.
One of the benefits of working with a licensed advisor is they are required only to show you alternative investments that fit your risk profile and are FINRA and SEC registered. This doesn’t mean they are approved by those government agencies, just that the investment was filed and is more “public” than private syndications put out by individuals and non-regulated parties.
Despite these challenges, the growth of alternative investments shows no signs of slowing down. According to a report by PwC, alternative assets under management are expected to grow from $10.7 trillion in 2020 to $14 trillion by 2025. This represents a significant opportunity for investors willing to embrace alternative strategies.
So, what does the future hold for alternative investments? Unlike large mutual funds that can accept almost limitless new investor money, most alternative investments are finite in the equity available for investors. Frankly, access to these investments will be a constraint, and only some advisors will have access.
In our 20 years focused on the alternative investment space, we have seen a massive demand for new investors wanting to “get in.” This is understandable and will increase the demand from clients to work with advisors who can meet their needs to gain access to this asset class.
Read more at Forbes.
Frederick Hubler is the founder and CEO of Creative Capital Wealth Management Group, a retainer-based wealth strategy firm specializing in alternative strategies located in Chester County, PA.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.