Who should invest in alternatives?
For decades, alternatives have been the preferred means for high-net-worth individuals (HNWI’s) and institutional investors to build wealth and protect themselves from the effects of inflation and market instability. Assets like venture capital, real estate, art, and franchising were mostly out of reach for the layman investor.
Fortunately for retail investors, regulatory changes and advancements in technology in the alternatives space have made investment opportunities available to a wider segment of the population. Now, people from many more walks of life have the opportunity to build and maintain generational wealth.
In this blog post, we’ll discuss what types of investors will likely find alternative assets most appealing.
Alternative assets, explained
An alternative asset is any type of investment vehicle that is not stocks, bonds, or cash. Alternative investments tend to have a low correlation with traditional asset markets, are less liquid, and can often be leveraged to provide a steady flow of passive income. Examples include:
Venture capital (VC) refers to private equity funds that invest in startups and early-stage companies. VC fund managers evaluate and select companies to provide with capital in exchange for equity, and they often act as mentors to entrepreneurs who need help navigating the business world. Fund investors (called Limited Partners or LPs) contribute capital to the fund and take a share of the returns when one or more of the startups goes public or gets acquired.
Buying agricultural, residential, and/or commercial property is one of the oldest investment strategies, dating back centuries. Today, investors have the option to buy and manage properties directly, invest in a Real Estate Investment Trust (REIT), or purchase fractional shares of a real estate portfolio via crowdfunding platforms such as LandVest or Fundrise.
A hedge fund is essentially the more diverse and risk-tolerant cousin of the mutual fund. Hedge fund managers are able to leverage more aggressive investment strategies for a wider variety of financial products with the goal of generating returns regardless of market conditions. Investors (ETFs).
The word “commodities” often refers to the raw, unfinished materials that are used to manufacture finished goods, such as wood, metal ore, oil, and other natural resources. Investing in commodities typically involves purchasing physical commodities, futures contracts, or shares of a commodity ETF or index fund.
Sculptures, paintings, photographs, and other works of art are real assets that can add both financial and cultural value to an investment portfolio. While investors have traditionally acquired their collections from galleries or at auction, new fintech platforms make it possible for users to purchase shares of art funds. In some cases, investors can leverage the equity in these assets by using a work of art as collateral for a loan.
Franchises are systematized businesses that follow a proven business model. They often operate in recession-resistant industries such as consumer or commercial services, healthcare, education, wellness, and personal care. Traditionally, the only way to invest in franchises was to become a franchisee, meaning someone who owned and operated a location. However, retail investors can now invest in a fractionalized portfolio of franchises.
The pros & cons of alternative assets
Alternatives are a unique asset class that comes with its own set of advantages and challenges.
Benefits of alternatives
- Diversification. Alternative assets come in every size, shape, and risk profile, which makes them a fantastic means for investors to add variety to their portfolio. Alternatives are rarely subject to dramatic short-term fluctuations and show little correlation with public markets.
- Passive income. Many alternatives can generate consistent streams of passive income through dividends and distributions.
- Recession and inflation resistance. Another benefit of many alternatives is that they are real assets with intrinsic value. Thus, they protect investors’ purchasing power from rising prices and preserve wealth in times of economic uncertainty.
Challenges of alternatives
- Low liquidity. Transactions involving alternatives are typically high-value and complex, which makes it harder to buy and/or sell them quickly.
- High upfront costs. Investing in certain alternatives requires a large initial outlay of cash, plus payment of fees, commissions, taxes, maintenance, and legal expenses.
- Complexity. Alternative assets often require special tax and regulatory treatment, which can be overwhelming for investors who are new to the space.
Who should invest in alternative assets?
Investors seek out alternatives for many reasons, but those with the most to gain are typically looking for:
One of the most defining features of alternative assets is the level of diversification they can provide. By investing in assets that rarely move in sync with the equity and stock markets, you can reduce risk and the impact of market fluctuations on your overall portfolio performance. And while these alternatives often require a higher investment over a longer time horizon, ensuring that a portfolio contains a wide variety of asset classes can potentially yield returns greater than the S&P 500, depending on the asset type, investment term, and economic factors at play.
With alternatives, investors can leverage their assets to create regular passive income through dividends and distributions. This is especially common in the real estate space, with property owners and managers generating income through rentals. Some investors focus on creating a portfolio that yields a regular “paycheck” through an approach called income investing. Income investing is ideal for later-stage investors who are less focused on growth and more interested in tactics that can sustain them into retirement.
Easy-to-use apps have reduced the barriers to entry for traditional asset markets that were already extremely liquid and low-friction – which has made them increasingly volatile. For investors who want to build their portfolios on more stable assets, alternatives are a good option. As mentioned earlier, alternative markets bear little to no correlation with mainstream securities markets and fluctuate minimally from day to day. In fact, many alternatives that are real assets experience a relatively reliable increase in value over time.
Some industries are better than others at generating income during economic downturns. When times are tight, consumers will look to cut costs however they can. So, investors will want to ensure some of their capital is allocated to investments in market sectors with less elastic demand. This can include real estate and franchises related to utilities, discount retailers, insurance, healthcare, essential services, and food.
Hedging against inflation
Rising prices can erode the value of traditional investments. To successfully hedge against these kinds of market conditions, a portfolio should be structured so its rate of return outpaces the inflation rate – and real assets tend to perform this function well. Tangible items with intrinsic value, such as collectibles or precious metals, are generally expected to appreciate over time. In addition, investors own real assets outright, making these assets an excellent means to both build equity and stay ahead of detrimental market forces.
Invest in franchises with FranShares
Franchises are the preferred alternative assets for investors who want to create a diverse portfolio hedged against inflation and recession. Now, FranShares is making it possible for investors to reap the rewards of franchise investing without the large outlay of capital or day-to-day location management. We’re bringing passive franchise investing to more investors using a unique fractionalized approach that allows people from all walks of life to own part of pre-vetted managed franchises with great return potential. Plus, our deep industry knowledge paired with no fees means that we help investors get maximum returns safely – so no one loses their shirt.
To learn more about FranShares and this unique opportunity, speak to our Investor Relations team.