Alternatives
While nontraded real estate investment trusts (REITs) have faced another challenging year, financial advisors are seeing a rise in sales of alternative investments overall. By August, financial advisors sold $76.6 billion of illiquid alternatives, including nontraded REITs, business development companies (BDCs), interval funds, and private placements.
This amount matches 2023's total, with projections indicating the industry will surpass $115 billion by the end of 2024. Sales of nontraded REITs have notably decreased to $4.2 billion in the first eight months, compared to their peak of over $33 billion in 2022.
However, BDCs have overtaken REITs as the most popular alternative investment sold, with $23.7 billion in sales through August. Blackstone Inc. leads in nontraded REIT and BDC sales this year.
Finsum: There is still an elevated risk premium built into most non-treasury rates right currently but REITs could see a bounce back with that falling soon.
Bitcoin miners are pivoting to AI due to decreasing profitability in crypto mining. Houston-based Lancium and Denver-based Crusoe Energy Systems announced a multibillion-dollar deal to build a 200-megawatt data center near Abilene, Texas, to cater to AI companies.
This project is the first phase of a 1.2-gigawatt build-out. At full capacity, it will be one of the largest AI data centers globally. The facility aims to utilize renewable energy and Crusoe’s technology to optimize energy usage.
The Abilene center is expected to be operational by 2025, marking a significant shift in energy use and data center strategies.
Finsum: We are really going to see the stresses of energy on alternatives like crypto this year.
Young, wealthy investors (ages 21-43) are gravitating towards alternative assets like hedge funds, private equity, and crypto, with nearly one-third of their portfolios in these categories.
They allocate less than half of their portfolios to traditional stocks and bonds, contrasting with older investors who prefer these conventional investments. This younger generation's investment preferences are shaped by greater access to diverse asset classes and experiences like the financial crisis.
They also hold higher cash allocations for liquidity, despite the potential risks of underinvesting. Diversifying into alternatives comes with unique costs and risks, including higher management fees and illiquidity.
Finsum: The introduction of crypto and many web 3.0 products have really spurned the growth of alts for younger investors.
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Alternative investing, which includes assets like private equity, real estate, and hedge funds, is becoming more accessible beyond just the ultra-wealthy and institutions. These investments can enhance portfolio diversification and potentially mitigate risk due to their low correlation with public markets.
Utilizing self-directed IRAs for alternative investments offers the added benefit of tax-free growth. The popularity of alternative assets is rising, with private market assets growing significantly and individual investors currently holding a small percentage of these assets.
Diversifying with alternatives can help manage market risk, especially during volatile times. New investment platforms are making it easier to access alternative investments, allowing for a more customized and balanced portfolio approach.
Over the past twenty years, alternative investment strategies like hedge funds, private equity, and real estate have grown in popularity among investors seeking diversification and steady returns. This trend was initially driven by the low-yield environment post-2009 financial crisis, making alternatives attractive due to their higher yields and low correlation with public markets.
However, the landscape shifted post-2021 with rising inflation and interest rates, as well as increased geopolitical tensions, challenging traditional investment approaches. Hedge funds have gained renewed relevance, offering uncorrelated returns amid market volatility.
Similarly, private credit has thrived, benefiting from the retreat of large banks from direct lending and providing attractive yields and diversification. Despite rising interest rates, alternatives with lock-up periods continue to outperform public markets, supporting a balanced, blended investment strategy for consistent returns.
Finsum: Remember the real advantage to alts is their uncorrelated returns and more specifically uncorrelated volatility to traditional markets.
The term beta represents an investment’s volatility relative to the overall market and is a concept that experienced investors understand well. Beta measures the sensitivity of an investment to overall market movements and is a measure of systematic risk, with the market typically represented by a broad index like the S&P 500.
High beta stocks exhibit more volatility and are typically growth stocks, while low beta stocks are less volatile and often include value stocks in defensive sectors. But this approach should be used when thinking about alternatives because they are being used to balance a portfolio.
Beta can change over time due to economic conditions and changes in a company's operations or industry. When assessing alternative investments, combining beta with correlation provides insight into an investment's potential role in a portfolio, enhancing diversification and risk management.
Finsum: You don’t need complicated financial models to assess beta, and integrating this historical return factor could greatly improve portfolio performance.