Alternative investing has historically only been available to the ultra high net worth individuals, pensions, and endowments. To better understand alternative investing we need to first define what traditional investing is. While definitions may vary the most common explanation of traditional investing is a portfolio that is made up of 60% equities (stocks) / and 40% fixed income (bonds). For investors who are more familiar with mutual funds or segregated funds this type of portfolio is most reflective of a balanced fund. Over the last 20 years alternative investments have become more accessible to the average investor. These investments should only be considered when the advisor recommending them is trained and knowledgeable of the risk of these investments. Investor alignment and the management behind these investments become two of the most critical factors to investment success. If management is mostly paid after the investor then management is well aligned with the investor to be motivated to be successful.
The Yale Endowment
In the mid 1980s typical endowment portfolios exhibited poor diversification, with roughly 50% in domestic equities, 45% domestic bonds and cash, and 5% in alternative strategies. Two and half decades later, average allocations have made substantial progress, with approximately 17% in domestic equities, and 18% in bonds and 65% in alternative strategies. (Source: Yale Endowment Fund 2010 Highlights, page 10)
It should be noted that to benefit from alternative investments you do not necessarily have to go to a 65% weighting in your portfolio. Most clients will have far less than 50% of their portfolio weighted to alternative investments. What is suitable to one investor is not suitable to another and therefore requires the assistance of your private wealth advisor.
So What is Alternative Investing?
Alternative investing can really be explained as investing in investments that have different risk characteristics than the 60/40 portfolio discussed above. The central theme to alternative investing is the concept of absolute return. Absolute return by definition is “The measure that looks at the appreciation or depreciation (expressed as a percentage) that an asset achieves over a given period of time”. This differs from relative investing which is the most common way of measuring performance of a traditional portfolio or mutual fund. In the fund world they will compare their performance relative to an index and or benchmark of similar funds.
Why Invest In Alternative Investments?
Alternative investing when executed carefully and through good diversification can generate attractive long term growth and income in your portfolio while also lowering the overall volatility. When managing the alternative portfolio we need to be cognisant of single asset risk or concentration risk. What we mean by this is alternative investments come to the market in different forms, some investments might be for a single business, or single real estate asset, while other alternative investments will bring a fund approach where the fund will hold multiple assets. As you can appreciate a fund approach offers greater diversification and lowers the reliance on one single investment to deliver a targeted rate of return.
We are not advocating that you run out and sell all your public securities and invest every cent that you have into alternative investments. We are suggesting that if you are not currently investing or looking at these investments as an option for your portfolio you are likely missing out. Suitability of these investments comes down to many factors, age, expected use of these funds, liquidity requirements, and overall risk tolerance. The most common split of traditional investments with alternative investments that we see would be 70% invested into a well balanced portfolio of stocks and fixed income investments with 30% invested into alternative investments. Critical to your investment success is to ensure sufficient diversification of both portions of your portfolio.
How do you invest in Alternative Investments?
Alternative investments are mainly distrubuted by licenced representatives who belong to an Exempt Market Dealer. Russ Hafer and Sean Wilson of Quarry Wealth Management hold an insurance licence that allows them to sell insurance products to manage risk, and also individually are registered with Securities Commissions to distribute alternative or exempt market investments through their registration with Raintree Financial Solutions which is an Exempt Market Dealer.
Who is Raintree Financial Solutions and What is an Exempt Market Dealer?
Raintree Financial Solutions is our Exempt Market Dealer and plays a very important role in the Alternative Investment Arena. Raintree is responsible for reviewing and sourcing alternative investment products for the private wealth advisors to distribute. Typically Raintree will review 30 deals before selecting one that can be listed on the product shelf. Prior to getting listed Raintree performs extensive in-house due diligence and also may obtain third party due diligence reports to corroborate their own findings and potentially identify risks or other potential information that may be important in the selection process. Raintree also reviews suitability of every purchase to ensure clients are well informed and hold diversified portfolios.