Displaying items by tag: alternatives

In a piece for ProfessionalPlanner, Michael Collins lays out some pros and cons of investing in alternatives. Overall, he takes a positive view of the asset class as it can boost returns and diversification. Additionally, it can allow investors to take advantage of short-term market inefficiencies which is more difficult through conventional investing and the most popular assets like stocks, bonds, or real estate.

Alternative investments are seeing strong growth over the last decade due to regulatory changes, and technology leading to increased access for private markets. In 2022, the asset class performed particularly well especially relative to stocks and bonds which were both down double-digits. 

One challenge is that alternative investments come in many different forms. Some examples include short-selling, a long-short portfolio, global macro, event-driven, arbitrage, private equity, venture capital, and private market investing. 

There are some drawbacks to consider. For one, there is less liquidity and transparency especially relative to more popular asset classes. Additionally, many alternative strategies do employ leverage which can be a double-edged sword during periods of economic or monetary stress. Another challenge is that alternative investments typically have higher fees than traditional investments which can erode returns over long periods of time. 

Finsum: Alternative investments are seeing a surge in interest due to their strong performance in 2022 and wariness about the economy and traditional asset classes.

In remarks at the BNY Mellon Pershing Institute covered by InvestmentNews’ Jeff Benjamin, former SEC Chair Jay Clayton shared his thoughts on the current regulatory environment, and why he believes that the SEC is doing many investors a disservice by preventing them from investing in private markets.

Clayton served as SEC Chairman under former President Trump between May 2017 and December 2020. He drew some differences from his tenure and the current administration, noting that “it’s pretty clear we’re in a very highly business-skeptical and commercial-skeptical regulatory environment.” Currently, Clayton serves as the nonexecutive chair at Apollo Global Management. 

Clayton also sees alternative investments as another area where the SEC is being overly restrictive, and it’s hurting retail investors by depriving them of opportunities that are available to institutional and high net-worth investors. He said that it’s hypocritical that retail investors are able to buy leveraged ETFs or options but not private investments that have significantly less risk.

In order to make alternatives available to all investors, he said that regulators would have to change their approach, and asset managers would also have to introduce appropriate products. 

He did acknowledge a conflict of interest, since Apollo has a major presence in private markets.

Finsum: At a recent conference, former SEC Chair Jay Clayton shared his thoughts on the current regulatory environment, and why he believes alternative investing needs to be further democratized.

In an article for the Institute for Management Development, Maude Lavanchy discusses the opportunities and risks of venture capital (VC). It’s not surprising that interest in alternative investments has increased following 2022 when both stocks and bonds posted negative, double-digit returns.

As a result, institutions and asset managers are increasing the amount that they allocate to alternatives and specifically, venture capital. Typically, venture funds focus on early-stage, high-growth companies. This obviously comes with considerable risk but also the potential to generate significant returns. These funds do tend to have higher costs and fees with much less liquidity 

Historically, VC has outperformed stocks and bonds. Between 1987 and 2022, VC had an average return of 59% compared to 15.9% for the S&P 500 and 6.8% for Treasuries. Two caveats are that venture returns tend to be quite volatile, and returns will be lower as more capital enters the ecosystem, leading to higher valuations and more generous terms for startups.

So, VC is most appropriate for investors that have a long time horizon and are OK with the lack of liquidity in exchange for the increased diversification and returns.

Finsum: VC is seeing renewed interest in 2023 due to its outperformance relative to stocks and bonds in addition to diversification benefits.

Tony Davidow, the Senior Alternatives Strategist at Franklin Templeton, recently penned a piece for the firm’s Beyond Bulls and Bear blog about how alternative investments are seeing renewed interest, and how they can help portfolios reduce volatility and increase income and growth prospects.

2022 was the first year in the past century that stocks and bonds were both down double-digits. And, the last time that both asset classes had negative returns was in 1931 and 1969. Of course, 2022 was a unique year as the global economy battled with rising rates, spiraling inflation, growing recession risk, and a myriad of geopolitical threats. 

It was quite painful for most investors and advisors whose portfolios are in stocks and bonds. But, it’s led to a surge in interest for alternative investments. Many outperformed in 2022 and led to reductions in portfolio volatility while helping boost portfolio income and serving as a more effective inflation hedge. 

Until recently, many alternatives were only available to large institutions. However, access to these investments has been democratized due to technology and regulatory changes. Therefore, advisors should be open to these investments especially if economic and market conditions continue to be challenging. 

Finsum: Following the events of 2022, advisors and investors should consider including alternative investments in their portfolio given their ability to reduce volatility and boost income. 

In an article for MarketWatch, Morey Stettner discussed various options for alternative investments including non-traded real estate, private debt, venture capital and hedge funds. The asset class delivered strong returns in 2022 especially compared to stocks and bonds. 

Looking ahead to the next decade, alternative investments are expected to fare better especially as they offer diversification to investors with the potential for higher returns. The traditional 60/40 allocation does not seem sufficient for a higher-rate, higher-inflation regime, and alternatives could be one solution for advisors to help clients reach their goals. 

There are also some additional considerations about alternatives that advisors need to understand. For one, money isn’t immediately deployed especially in private equity and venture capital. Additionally, money often cannot be immediately redeemed, while there is less transparency about pricing in less liquid markets. 

Many investors see opportunities in private real estate and venture capital especially as savvy managers will be able to take advantage of the dislocations in these arenas. Many also believe the asset class would outperform in a recession or inflation scenario which would likely continue to be a major headwind for stocks and bonds. 

Finsum: Alternative investments continue to attract interest especially due to stocks and bonds coming off a poor year in 2022.