Alternative investments seem to be popping up left, right, and center these days. Wall Street firms regularly tout their expertise in these assets. They try to convince us we must move beyond the public markets and diversify our portfolios with something more exotic than stocks and bonds.
Just last month, J.P.Morgan strategist Jay Serpe likened the start of a private fund's lifecycle to a fine wine's vintage year, speculating that lifecycle, speculating that 2023 may be the ideal time for private funds to launch and “realize strong relative returns over time.”
Initially, alternative investments were only available to the wealthy, as defined by the SEC's accredited investor definition. To be eligible to invest in these alternative investments, one has to have an income of at least $200,000 (individual) or $300,000 (joint) for the last two years. Additionally, the rule states the investor expects that income to continue going forward.
If they don't meet this income requirement, accredited investors must have a net worth of at least $1,000,000 (exclusive of personal residence). Though that group is growing, it leaves out millions of people who could benefit from the diversification offered by this asset class.
Alternative investments were characterized by high fees. Managers charged investors 2% of the amount invested plus 20% of profits. Let's have a look at what that means.
The High Cost of Fees
If someone invested $100,000 in a fund, and the fund earned 10% (and few do), the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + $10,000 x 20% = $2,000). That means instead of making $10,000 on your $100,000 investment, you would only walk away with $6,000! Instead of a 10% return, you earned 6%! That's a 40% drop in your profit!
Also, you typically couldn't access your money until the project or fund sold or closed, which often took five years or more.
Over the years, investors wised up to the scheme, as did other investment product producers. They introduced lower-cost, more liquid alternative investments to the marketplace and lowered the bar for investing.
Below we will introduce you to six investments you may not have considered – three for accredited investors and three for everyone else. By the end of the post, you'll know what to look for when sizing up these investments for your portfolio.
What Are Alternative Investments?
Let's start with traditional investment products – stocks, bonds, and cash. Whether it be in U.S. and international markets, investors hold either stocks, bonds, or cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs). The most popular form of investing in these markets is via index funds.
When investing in index funds, investors put their money in funds that mirror the market. No fund managers are picking which stocks to buy, when to buy them, and when to sell. Instead, through index funds, investors get all the stocks in that index (like the S&P 500) at the same proportional weighting each has in the index.
Rather than trying to beat the market, investors take what the market offers. It's a very inexpensive and easy way to invest.
Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products.
You may have heard these names thrown around in the financial press. In addition to high fees, many alternative investments have high minimum initial investments.
Crowdfunding – The Game Changer
As evident from the outrageous fee structures, alternative investments had become ossified and were ripe for disruption. Companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. They have been a game-changer for the everyday investor.
Crowdfunded Real Estate Investment Trusts (REITs) are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds (usually under Regulation Crowdfunding).
Crowdfunding in real estate, like individual or small business crowdfunding, allows smaller investors into an investment space that hasn't been available to them in the past.
We'll offer a couple of specific funds to consider shortly.
Other options include mutual funds (managed futures, commodities, long-short funds, etc.). We will leave the discussion of these for another day. We want to focus on private funds, which are more like the traditional alternative investments initially designed for the wealthy.
Alternative Investments for Everyone
We want to highlight three investments available to non-accredited investors. One, Vinovest, is a unique offering. The other two, DiversyFund and Fundrise, are crowdfunded real estate funds, as described above.
Let's dive in.
Vinovest offers investors a taste of a unique asset class – fine wine. (Read our detailed review of Vinovest here.)
The first thing to know about investing in fine wine is that it takes knowledge to understand how to choose the right wines. Vinovest has a team of experts, called sommeliers, who have undergone rigorous training over several years. Three of their four sommeliers have achieved the Master Sommelier title. That's the highest degree of recognition in the wine industry. These folks know their wine.
Wine selections come from their knowledge and a sophisticated algorithm their technical team developed. The result? The best wines with the best chance of price appreciation. You own the individual bottles. Vinovest will store and age the wine at their state-of-the-art facilities. They guarantee the safety of your wine.
The minimum investment is just $1,000. It's a unique offering and worthy of consideration.
Fundrise and Diversyfund
Crowdfunding offers a method of fundraising that can bypass Wall Street firms and big banks with their high rates and fees. The introduction of crowdfunding was disruptive. In crowdfunded real estate, non-accredited investors now have access to similar real estate investments that accredited investors have always enjoyed.
Both FundRise and DiversyFund are crowdfunded real estate funds. Investors can invest in these funds with as little as $500.
Here's a summary of each. You'll find a link to our review of both for reference.
Fundrise has invested over $2.5 billion to date and has a history of above-average returns. They offer three core plans to get you started – Supplemental Income, Balanced Investing, and Growth. Each name describes the goals of the fund. If you're looking for income, consider the Supplemental Income fund.
If you want a mix of income and growth, go with the Balanced Investing Fund. Are you looking for capital appreciation? Choose the growth fund.
You can get more details and learn more about REITS and crowdfunded real estate in this review.
Contrary to Fundrise, DiversyFund is reasonably new to the crowdfunded real estate space. Unlike the Fundrise investment options, the team at DiversyFund focuses on growing investors' capital. They have a value add investment strategy when looking for properties.
That means they look for multi-family properties (apartments, condos, etc.) that have positive cash flow (renters) in good neighborhoods. The value adds to their property selection comes from finding properties that need some work. We're not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint.
With the improvements, they can charge more rent when the leases expire, and new tenants come on board. Get additional details from this review.
Alternative Investments for Accredited Investors
What follows are three recommendations for those of you who meet the criteria of the accredited investor. What follows are offerings that have much lower minimum investments and fees. Two are crowdfunded offerings. The other is not.
Have you ever thought about investing in farmland? Did you not pursue it because you didn't know you had enough money or didn't know enough about it? If either of those describes you, you need to learn about FarmTogether.
FarmTogether offers a low-cost investment opportunity that allows investors to own real agricultural land. Farmland is less subject to inflation and more stable than many other investments. Why? For one thing, we're not making any more of it. As populations soar, humans are running out of space on this planet. The law of supply and demand means it is likely to increase in value.
For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many other alternative investment offerings. And there are precious few funds that offer investment in farmland with cash flow.
You can read our full review here.
YieldStreet is a fixed-income alternative investment. The team focuses on investments in litigation finance, real estate, and consumer and commercial financing, to name a few. Getting into these types of alternative fixed-income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want.
They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.
You can read our review of YieldStreet here.
PeerStreet is another alternative investment in the real estate space. Rather than buying properties, the team at PeerStreet invests in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans.
The returns for loan investments are above average. The Loan-to-value (LTV) of the properties shows they are not heavily leveraged, and the terms are relatively short. Like many of the investments we highlight here, PeerStreet has a low minimum investment of only $1,000 per loan.
Be sure to check out our review of PeerStreet to learn more.
Finding Other Alternative Investments
When it comes to investing, there are numerous options from which to choose. The problem comes in knowing where to look for the options. MoneyMade has you covered. What is MoneyMade?
From our review: “It's a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.”
And it's super simple to use. Just enter the investment criteria you're looking for and let MoneyMade do the rest.
Read our review of MoneyMade to learn more and take advantage of this great new platform.
I hope by now you see that alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds and, more recently, from the crowdfunded investment arena have reduced costs and minimum investments. That's not so good for the Wall Street product producers – but it's great for consumers.
The six investments we highlight are, by no means, meant to be a fix-all solution for alternative investments. However, we do think that Vinovest and FarmTogether are two of the more unique offerings available.
Before doing any investing, you should know why you're investing. You should know what you want your investments to do for you. Once you get those foundational questions answered, you can investigate the best investments to help you achieve those goals. If you need help figuring out where to start, a great place would be MoneyMade. If you need help deciding, consider hiring an independent financial advisor.
Whether you're a seasoned investor or a rookie who is looking for alternatives to stocks and bonds, we think the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you're looking for.
Diversifying your portfolio just got easier!