It’s the most wonderful time of the year. Lights are going up around town, kids are eagerly anticipating a break from the scholastic grind, and savvy investors are considering how to position their portfolios for maximum after-tax gains in the years to come. One popular strategy that has traditionally paired well with the festive season is tax-loss harvesting.
Tax-loss harvesting begins with an investor considering their likely tax bill for the year and noticing a higher number than they would like to see, perhaps from selling a big stock winner or business. Rather than foot a hefty tax bill today, investors can sell an investment that has declined in value and use the realized loss to reduce their taxes. This not only eases the temporary burden, but Vanguard estimates that it can improve after-tax returns by above 1% annually, with the largest benefits accruing to the largest taxpayers with net worths above $1.2MM.
To understand why that might be the case, consider an investor, Bob, who makes a $100 investment in a stock that declines in value to $80 over a year (a 20% loss) and subsequently doubles in value to $160 (a 100% gain) before he needs to sell it to retire. Were he to hold that investment to retirement, he would take home $148 net of an assumed 20% capital gains tax rate. If, instead, Bob sells the investment at a 20% loss in the first year, he can use that loss to offset ordinary income or other short-term gains taxed at an assumed 30% tax rate, saving $6 in taxes ($20*30%). If he then reinvests the $80 of proceeds and the $6 tax savings back into a similar investment, that investment could grow to $172 ($86*2) by Bob’s retirement. Even after paying taxes on his gains, Bob walks away with $154.80, or $6.80 more than he would have had holding the investment all the way to maturity. $2 of that is from the lower assumed tax rate, and $4.80 is from Bob’s ability to compound capital for a longer stretch of time before paying any taxes.
There are a couple of simplifications to Bob’s example for investors to consider. First, the difference in Bob’s tax rates between year one and retirement was 10%, which assumed that Bob had short-term capital gains or standard income to offset short-term capital losses. Standard income can only be offset to a maximum of $3,000 annually, though some losses can be rolled. Investors should consult tax professionals to understand the specifics of their situation. Additionally, Bob’s savings rely on the underlying asset’s volatility. Repeating the same exercise with a year-one value of $90 and an exit value of $130 yields only $3.07 of savings. Finally, if Bob sells shares in a stock and purchases shares in the same stock, he will run afoul of IRS rules around “wash sales” and lose his ability to deduct losses from his taxes. Wash sale rules prohibit investors from buying securities that are the same or substantially identical within 30 days of selling below cost, so for Bob to operate within the rules, he would need to either wait for over a month to reinvest and risk prices moving away from him, or invest in a substantially different security with potentially different returns. Investors should consult legal counsel for more specifics.
What does tax-loss harvesting have to do with alternative investments? Alternatives are a great place to park the cash from tax-loss harvesting because of high historic returns, most of those returns coming in the form of long-term capital gains, and no issues with wash sales. Data provider Hamilton Lane looked at 10-year rolling returns from Private Equity and public markets side-by-side and found Private Equity outperformed all three public benchmarks in all but a handful of quarters since 2001. On the private equity side, most of those returns have come from long-term capital gains because investments are typically held for three or more years. They also do not trigger wash trading rules, as each fund has a different mix of portfolio companies.
Tax-loss harvesting comes with some complexities investors should review carefully, but has been shown to increase after-tax returns and free up liquidity. Investors evaluating the strategy should consult tax and legal advisors and carefully consider which investments to rebalance into that steer clear of wash trading rules and provide compelling returns. Alternatives have a role to play in many accredited portfolios and deserve a long look from properly qualified investors.
Ready to diversify your portfolio with alternatives? Join our network of investors, wealth advisors, and family offices to get access to top-tier fund managers across venture capital, private equity, private credit, and real assets. Gridline is free to join. Get access now to review all fund details instantly.
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The classic investment disclaimer, “past results are not an indicator of future success,” is never more important than when considering established fund managers against emerging fund managers.
Venture capital is a space where strong early returns can reverse in a hurry. Nearly 18% of first-time funds nab an internal rate of return (IRR) of at least 25%, while later funds only exceed that number about 12% of the time, according to Pitchbook research.
Newer managers – defined here as having three or fewer funds under their belt- have some inherent advantages. They frequently have spun out of larger funds, bringing years of experience honing their craft at large firms. Additionally, these newer managers can bring innovative new ideas to the table by striking out on their own, helping recognize trends that more established funds may miss.
Here are four more reasons why emerging managers tend to hit home runs:
The IRR of early funds is a crucial indicator for emerging managers. High early IRRs help managers recruit new LPs, increase check sizes from follow-on LPs for future funds, and build out young organizations.
Emerging managers often leave secure, high-paying jobs to start their own funds, facing significant uncertainty. This only makes sense if those managers truly believe in the potential to generate outsized returns in their area of focus. Because these managers have an outsized personal and professional stake in Fund I’s success, those funds are more likely to outperform.
The math is more favorable for smaller funds. A smaller fund means smaller checks, which naturally makes generating higher returns a little easier. You’re more likely to exit at $100 million than something like $1 billion. When you scale up a fund size, you either have to invest in more companies or make bigger investments. The former stretches your human capital, and the latter could put you in a much different market from where you’ve found prior success.
We’re strong believers in actively managed funds, where fund managers don’t just give startups cash but they offer expertise through board seats or technical assistance to ensure venture-backed companies thrive. Gridline has a cohort of top-notch, experienced investors, and we’ve benefited from their active involvement, industry expertise, and network.
That model doesn’t scale well when human capital is limited. Diminishing returns can be a real problem in labor-intensive tasks like building companies. Limited attention is one of the big drivers of the wide dispersion in returns you see across private equity, with investments underperforming substantially when firms have a large number of simultaneous investments.
Asset management consultant MJ Hudson noted in a 2018 report that while management fees for larger funds are falling, the size of funds has increased so substantially that these fees represent a “significant profit center.”
That can create misalignment between fund managers and their investors. Established managers raising mega-funds, who may have fees coming in from prior funds as well, may not feel the same pressure to hit a home run and cash in on their performance fee. They can return nothing to investors and still earn plenty, thanks to the size of the fund.
Emerging managers not only have a smaller share of their income coming from management fees, but they’re also trying to build a personal brand to justify bigger, successive funds. You can only do that with a strong performance.
Emerging managers are grinders, hungry for success the way a young underdog is against a perennial winner in the sports world. This tightly aligns their goals with LPs – a strong return means both the manager and their partners win.
Navigating a volatile market can be difficult. The level of uncertainty related to inflation, rising interest rates, high private asset valuations and geopolitical risk are putting markets under significant pressure.
Most people think about downside protection by moving investment portfolios into cash. But cash holdings make close to no interest and they lose purchasing power when prices rise during inflationary periods. One dollar buys less than before, leading to negative returns.
You may have heard the term “buying the dip,” which refers to how increasing volatility becomes an opportunity to acquire assets at a lower price. Market downturns that result in mark-to-market losses present an opportunity to buy cheaper assets that profit when the market rebounds.
The conventional wisdom was that private markets follow public markets with a six-month lag. This trend is accelerating with transactions that were closing at a billion dollars a few months ago now often closing at half the value.
A high valuation is great for the company that closed the transaction, but it now has a lofty valuation to grow into during potentially difficult markets.
If you could invest in the same company at half the price, would you?
Investors deploying capital now are entering the investment at a compressed valuation that lowers the cost basis, which may provide the same or better returns with lower hurdles, commonly referred to as the goal posts. A 3x return on a $500 million investment looks very different from a 3x return on a $1 billion or greater investment.
Having a sound investing strategy and allocation plan allows you to select the right asset class to enter when volatility is introduced, and prudent investment behavior and a long-term outlook are key to the preservation and growth of your investment portfolio in all market cycles.
Sound investing requires a long-term strategy, and Warren Buffett has a great perspective for how you should view your portfolio.
“It’s exactly the same way as if you are going to buy a farm,” he said. “You would not get a price on it every day and you wouldn’t ask whether the yield was a little above expectations this year or down a little bit. You’d look at what the farm was going to produce over time.”
Alternative investments take this long-term approach to heart. Just look at the dot-com crash of the early 2000s. In the decade following that period, the public market equivalent index’s annual return fell to 0.08% while private equity maintained a robust 7.5% average.
Alternatives offer two great benefits to counter the movements in the public market:
Many investors — especially those in the “Next-Gen Wealth” category — are overwhelmingly steering their individual portfolios toward alternative investments in order to stave off the volatility of inflation, rising interest rates and geopolitical uncertainty.
Deploying capital with active fund managers in the private markets is the best way to realize these outsized returns and offers a greater chance of exposure to breakthrough companies (sometimes referred to as “capturing private market alpha”), while providing diversification across geographies, sectors, business models and theses.
Experienced fund managers not only are great at selecting companies to invest in, but the true value comes from everything that happens with the portfolio after the initial investment. This includes board work, hiring strong teams, allocating capital in follow-on rounds and working to get exits.
Private market investments provide unique opportunities for investors to directly impact the growth trajectory of their investments, potentially leading to higher returns. Let’s explore the concept of endogenous growth, its relationship with private market investments, and how investors can benefit from this economic phenomenon that is often unattainable through public market investments.
Endogenous growth theory highlights the importance of human capital, innovation, and technological advancements as drivers of long-term economic growth. Unlike neoclassical growth theory, which relies on exogenous factors, endogenous growth theory underscores the significance of knowledge spillovers and increasing returns in R&D.
Private market investments, by nature, channel capital into innovative companies developing new technologies and intellectual properties. This approach accelerates endogenous growth while also creating a symbiotic relationship between the private sector and the broader economy.
The empirical evidence supporting the connection between private market investments and endogenous growth is both robust and varied.
Harris, Jenkinson, and Kaplan (2014) conducted a comprehensive study demonstrating higher returns on private market investments, revealing that private equity investments have consistently outperformed public market equivalents by 20% to 27% over a fund’s life. Private markets’ long-term alpha generation potential is evident from their analysis of 1400 private equity funds and their underlying investments.
Additionally, private market investments play a significant role in fostering innovation. Kortum and Lerner (2000) found that an increase in venture capital investments directly led to an increase in the number of patents. This finding highlights the importance of private market investments in driving endogenous growth through innovation.
Another key aspect of endogenous growth is employment generation and productivity enhancement, both of which have been linked to private equity investments. In their study, Davis et al. (2014) discovered that private equity-backed companies experienced a significant increase in employment over a five-year period, outperforming their non-private-equity-backed counterparts. Moreover, Boucly, Sraer, and Thesmar (2009) showcased that French companies bought out by private equity exhibited an annual productivity and profitability growth premium.
Lastly, private market investments can also catalyze endogenous growth through spillover effects on the broader economy. An increase in venture capital investments leads to a rise in entrepreneurship, spurring job creation and income growth in the broader economy. This underscores the potential of private market investments to contribute to endogenous growth through knowledge spillovers and human capital development.
While the benefits of private market investments are clear, historically, they have been limited to sophisticated family offices and endowments.
Thanks to digital platforms like Gridline, a first-of-its-kind digital wealth platform, individual investors can now access top-performing alternative asset managers in a fully digital experience, allowing them to build diversified portfolios within minutes and capitalize on endogenous growth.
In recent years, private markets have attracted significant interest from investors seeking to diversify their portfolios and enhance their returns. The rise of private equity, venture capital, and other alternative investment strategies has highlighted the potential advantages of private market investing. Let’s explore the “game theory” perspective on private markets, illustrating how factors such as information asymmetry, reduced competition, aligned incentives, and long-term focus reinforce the advantage of private market investing with better returns than those offered by public markets.
In private markets, there is often less information available to the general public than in public markets. In fact, the annualized return for PE was 11.0% over a 21-year period, compared to 6.9% for public stocks over the same time, thanks to informational advantages.
This information asymmetry creates opportunities for investors with superior knowledge, expertise, and access to information. By leveraging their informational advantage, these investors can identify undervalued assets and achieve higher returns than their counterparts in public markets.
Public markets, with their accessibility and liquidity, have a broad appeal, attracting millions of investors. In 2022, 58% of American adults invested in the stock market, amounting to approximately 150 million people. This immense level of participation can result in a highly competitive environment where information is quickly assimilated and asset prices are driven toward their true value, leaving fewer opportunities for investors to capitalize on inefficiencies.
Moreover, the number of public companies has been shrinking. In recent years, there have been around 4,000 companies listed on public exchanges in the United States. Further, private markets have a significantly smaller investor base. In 2016, there were an estimated 12 million accredited investor households in the United States: A small fraction of the 150 million American stock market investors.
Adding to this dynamic is a vastly larger number of private companies. There are approximately half a million private companies in the United States. In 2020, there were around 4,500 private equity firms in the United States, backing approximately 16,000 private companies. This landscape of far more companies and fewer competing investors in private markets presents a fertile ground for identifying and investing in undervalued assets.
A crucial factor contributing to this abundance of private companies is the decline in the number of IPOs. Companies increasingly opt to stay private for longer periods, allowing them to avoid the pressures and regulatory scrutiny associated with going public. This trend has resulted in an expanding pool of private companies ripe for investment, presenting many opportunities for discerning investors.
In public markets, the interests of investors (principals) and company management (agents) may not always be aligned. This misalignment can result in agency costs that reduce overall returns.
In private markets, investors often have more direct influence and control over the companies they invest in, which can help better align interests and improve returns.
Further, public markets are often characterized by short-termism, with investors and companies focusing on quarterly results and stock price fluctuations. Private markets tend to have a longer investment horizon, allowing for more strategic decision-making and potentially higher long-term returns.
In recent years, private markets have attracted significant interest from investors seeking to diversify their portfolios and enhance their returns. Game theory provides valuable insights into the dynamics of private markets, illustrating how factors such as information asymmetry, reduced competition, aligned incentives, and long-term focus contribute to better returns than those offered by public markets.
Gridline, a digital wealth platform, aims to provide individual investors and their advisors with access to professionally managed alternative investment funds in private markets. Through its institutional-grade process for identifying and evaluating top-performing fund managers, Gridline offers a curated selection of funds that enable diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
Information asymmetry, the phenomenon where one party has more or better information than another, has long been a subject of interest for economists and market participants.
Recognized by George Akerlof, Michael Spence, and Joseph Stiglitz with a Nobel Prize in 2001, information asymmetry has significant implications in the world of investing. In private markets, this disparity in information can lead to lucrative investment opportunities for savvy investors who can effectively identify and capitalize on these inefficiencies.
Let’s see how investors can leverage information asymmetry in private markets to gain a competitive advantage and ultimately achieve superior returns.
Unlike public markets, where companies must disclose financial information and comply with strict regulatory requirements, private markets are characterized by a relative lack of transparency.
Nonetheless, private capital AUM grew from $4.08tn at the end of 2015 to $8.90tn at the end of 2021, representing a compound annual growth rate of 13.9%. Further, Preqin predicts that global AUM for the alternative asset class will increase to $23.21tn by 2026. This growth can be attributed, in part, to the potential for higher returns and diversification benefits offered by private markets.
Information asymmetry in private markets can arise from various factors. One key contributor is the limited financial disclosure of private companies. A report by Preqin revealed that 59% of private equity investors cited a need for improved fund transparency to improve the alignment of interests.
Unlike their public counterparts, private firms are not mandated to release detailed financial information, making it challenging for investors to assess their true value. Further, investors with specialized knowledge and industry experience may possess information not readily available to others, enabling them to make better-informed decisions. Lastly, investors who have built strong networks and relationships within a particular industry can gain valuable insights and access to opportunities others may not be privy to.
While information asymmetry in private markets presents opportunities for investors to achieve superior returns, it also poses unique challenges. The lack of transparency and limited financial disclosure can make it difficult for investors to accurately assess the value of potential investments, leading to a higher risk of loss or underperformance if the hidden risks are not appropriately accounted for.
This underscores the importance of a rigorous approach to investment selection, due diligence, and risk assessment.
Leveraging information asymmetry in private markets offers numerous benefits. One of the most significant advantages is the potential for superior returns. Investors can achieve higher returns than those attainable in more efficient public markets by capitalizing on market inefficiencies.
According to a study by Cambridge Associates, investments led by section specialists across four sectors generated a 23.2% gross IRR, outperforming generalist investments at 17.5%. A rigorous approach to investment selection is needed to uncover these opportunities.
A data-driven approach also helps investors to uncover mispriced assets. A report by Broadridge found that 60% of asset managers believe that leveraging data and analytics is essential to gaining a competitive advantage in the market.
Moreover, a deeper understanding of a company or industry can help investors more accurately assess risk and make better-informed investment decisions. This knowledge-driven approach can ultimately lead to enhanced portfolio performance and risk mitigation.
Gridline, an alternative investment platform, effectively navigates the challenges of information asymmetry in private markets by providing rigorous analysis, expertise, and access for investors. By leveraging its deep industry knowledge, proprietary data, analytics, and strong networks and relationships, Gridline uncovers hidden opportunities, mitigates risks, and ultimately helps investors achieve superior returns.
Investors are shifting their portfolio allocations to alternative assets in droves. Traditional assets, or stocks and bonds, fail to provide the returns, diversification, and security investors need in the current market environment. As such, many are turning to investment funds to provide them with the returns they desire.
But what many investors don’t know is that there are tax advantages to investing in these funds. Chiefly, the illiquid nature of private market funds means that investors will benefit from long-term capital gains tax rates far lower than ordinary income tax rates.
Carried interest, which has a history dating back to the Renaissance, is the portion of future profits that investment fund managers receive from the investments they manage. Typically, fund managers charge investors a management fee, often 2% of the assets, and retain 20% of future profits generated by their investments.
The IRS permits the taxation of carried interest as capital gains, resulting in a significant financial benefit for the private equity and venture capital industry. The federal long-term capital gains tax rate is 20%, whereas the top federal income tax rate is 37%.
This difference in tax rates incentivizes investors to allocate their portfolios to investment funds that can take advantage of the favorable tax treatment of carried interest as capital gains.
In the US, long-term capital gains are taxed at one of three rates: 0%, 15%, or 20%. Capital gains taxes are only applied to gains above the investor’s cost basis.
If you’re single and earn less than $41,675, you are eligible for the 0% capital gains tax rate. Investors who earn between $41,675 and $459,750 are subject to the 15% rate, and those earning more than $459,750 are subject to the 20% rate.
The tax brackets look slightly different on the income side but are much more severe. Single taxpayers who earned over $539,900 will have to pay $162,718 plus 37% of the excess over $539,900.
Income tax applies to any capital gain realized on a security that was held for less than one year. For instance, if you were day trading stocks on Robinhood, you would be subject to the ordinary income tax rate. Tax rates on collectibles, like art or wine, are much steeper than long-term holdings on private equity or venture capital, with a max 28% tax rate.
Investing in private market funds through retirement accounts, such as a 401(k) or IRA, offers additional tax advantages. The funds in these accounts grow tax-deferred, meaning investors won’t have to pay taxes on investment gains until the money is withdrawn during retirement.
Institutional investors, such as endowments and family offices, have long recognized the tax benefits of alternative assets in their portfolios. By adopting a long-term view of investing, they have outperformed traditional benchmarks for decades.
Private market investments often come with a lock-up period of up to ten to twelve years, aligning well with the illiquid nature of retirement funds.
Simply put, investment funds offer meaningful tax advantages, alongside attractive risk-adjusted returns. With the built-in ability to take advantage of long-term capital gains tax rates, investors can increase their returns and create generational wealth.
In finance, a theme is an investing style or strategy in which an investor seeks to profit from companies benefiting from specific secular trends. Thematic investing is a popular and growing approach to active investing, as it allows investors to target investments based on their preferences and views about the future.
A thematic approach can help you identify companies well-positioned to capitalize on megatrends. For example, the Energy Select Sector SPDR Fund (XLE) tracks the 23 energy stocks in the S&P 500. XLE gained 64% in 2022 as high inflation, supply chain constraints, and the war in Ukraine caused commodity prices to soar.
Another ETF, Simplify Interest Rate Hedge ETF (PFIX), used creative OTC derivatives to benefit from rising interest rates. PFIX gained 94% returns in 2022 as the Fed turned off the printers and hiked rates. With generative AI and the metaverse well into the Gartner hype cycle, some investors are looking at the WisdomTree Artificial Intelligence and Innovation ETF (WTAI) and the Roundhill Ball Metaverse ETF (METV) to capitalize on these themes.
MSCI offers a large suite of thematic indexes across four categories: Environment and resources, transformative technologies, health and healthcare, and society and lifestyle. If you’re interested in thematic investing, here’s a guide to get you started.
On the risk side, portfolios focused on a few trends may be more volatile than traditional portfolios. We can see that, for instance, the ARK Innovation Fund had abysmal performance in 2022. And since these investments are based on long-term structural changes, they may take longer to play out, or they may not play out at all.
On the return side, well-chosen thematic investments can offer the potential for higher returns than traditional investments. They can also offer diversification benefits since they often have low correlations with other assets.
Research shows that from April 2018 to March 2022, eight of MSCI’s nine thematic indices outperformed the benchmark ACWI index. Cybersecurity was the top-performing index, with a 22% CAGR, or double the ACWI benchmark’s 11% return.
The universe of available publicly-traded companies limits Thematic ETFs. Private companies are staying private for longer and are, therefore, off-limits to traditional ETFs. Even some publicly-traded companies are opting to return to private ownership.
This presents an opportunity for investors interested in thematic investing. Private companies often have a longer runway to execute their growth plans and may be less affected by short-term market volatility, quarterly earnings pressure, and other factors. They also provide an illiquidity premium or, more aptly, a complexity premium.
To access these opportunities, investors can consider private equity and venture capital funds, many of which have a thematic focus.
Private market investments have historically outperformed public markets in bull and bear markets. In fact, the average VC fund generates a 19% internal rate of return (IRR), compared to an 11% IRR for the S&P 500.
These differences become particularly pronounced in downturns. Ten years following the dot-com crash, private equity maintained a 7.5% average, compared to 0.08% for the PME index.
Not all themes are created equal. Some megatrends may be overhyped, while others may be under-the-radar. It’s important to conduct your own research and consult with experts before making any investment decisions.
In addition, it’s important to consider your risk tolerance and investment timeline. Thematic investing can be volatile, so it’s not for everyone. If you’re investing for the long term, though, a thematic approach can offer the potential for higher returns.
Diversification helps smooth out the ups and downs of individual investments, so it’s important to build a diversified portfolio. This can be done by investing in Gridline’s Thematic Portfolios, which allow investors to benefit from diversification across a mix of funds based on asset type, sector, stage, and geography. Gridline selects 5 to 10 underlying funds to build a diversified holding based on a specific investment thesis.
At its peak, Enron’s shares were worth $90.75, falling to just 26 cents when it filed for bankruptcy. The scandal left behind a wide-ranging investigation and far-reaching regulations to prevent such fraud from occurring again. But one of the most overlooked aspects of Enron’s demise was how its use of special purpose vehicles (SPVs) created a web of complexity that made it difficult to monitor the company’s risk exposure.
Enron creatively used SPVs to hide mountains of debt and toxic assets from investors. This technique allowed the company to increase its indebtedness without appearing highly leveraged, deluding shareholders until it was too late and the stock price plummeted.
SPVs are perfectly legal entities that can be used for any purpose, including securitization and debt financing. In venture investing, they’re essentially pop-up funds that pool money from accredited investors to buy a stake in a single privately held company.
However, as we’ve previously explored, the risks of these vehicles come from their lack of oversight and a lack of regulation that results in the smallest investors being paired with the riskiest deals. Now, these risks have been amplified in the current bear market.
An SPV administration services firm, Assure, launched over 2,000 SPVs in 2021 alone. In 2022, however, the downturn meant a slowdown of new clients, and Assure could no longer keep up with the costs associated with maintaining its platform. As a result, Assure’s users now find themselves without services and with thousands of SPVs in limbo.
Users must find a new home for their funds, with thousands of dollars in new fees and a complicated process to transfer investments. Not only that, but not everyone has gotten their money out of the platform. The uncertainty of the situation has left some investors feeling vulnerable and uncertain about their investments.
Assure wrote on their site that they handled “deal setup, investor onboarding, KYC/AML, documents, banking, 1065s, K1s, and more. These services have been halted, leaving investors to manage these processes themselves.
Assure’s customers don’t just face the risk in SPVs. SPVs often represent a complete lack of portfolio diversification, meaning that investors risk losing all of their money when one company fails.
Moreover, in a bear market where private valuations have already been falling, and venture capital firms are pulling back, the risk of these investments has increased. Investors must now question whether their investments are adequately protected against losses from a prolonged bear market. With less oversight and governance than venture investing, the risk of an SPV failing is higher than ever.
Instead of relying on these pop-up funds to get exposure to private companies, investors would be better served by seeking active management that can provide proper diversification and a higher level of protection against market downturns. Gridline’s platform enables access to a curated selection of professionally managed alternative investment funds, allowing investors to build diversified portfolios of private market assets with lower fees and greater liquidity.
Despite the harsh macroeconomic environment, over 20 million people are set to become millionaires in the next few years. This will be no thanks to the public markets, however, as the bull market from 2009 to 2022 is unlikely to repeat.
Allianz calls the years before 2022 “the last hurrah” for the public markets, and investors looking for higher returns and more diversified portfolios are increasingly turning to the private markets.
To succeed in a more challenging investing environment, here are 10 New Year’s resolutions that could help strengthen your portfolio.
The 60-40 portfolio was the golden standard of investing for decades, but it is no longer sufficient for investors looking for higher returns. In the next decade, the S&P 500 is projected to return a mere 6% average annualized, while bond returns fail to even keep up with inflation.
In comparison, the median private equity fund returns a net IRR of 19.5%. The good news is that private markets are becoming more liquid, accessible, and with lower capital minimums than ever before. Accredited investors can now explore private markets with confidence and strengthen their portfolios.
Many investors are familiar with the concept of investing in “winners” and “losers.” The problem, of course, is that it’s impossible to know which will be which ahead of time.
Instead of gambling on a single manager, a better approach is to build a portfolio of managers across vintages. This way, you diversify your portfolio over time and increase your chances of successful investments.
First-time managers and smaller funds, in particular, have historically outperformed larger, more established funds. This is because they are often hungrier, more agile, and have greater access to deal flow–as it’s easier to find a good deal when fewer people are looking.
Passive ETFs and index funds became wildly popular in the 2010s bull market. When markets are going up, it’s easy to invest passively and make money.
But when markets become more volatile, passive investing can lead to significant losses. 2022 was a cautionary tale of this, as passive 60-40 investors lost the most money of any year in recent history.
Investors should demand that active management be part of their portfolios. This means getting behind managers who do the work to advance their portfolio companies. Active management is truly the way to reap the rewards of the private markets, and it’s part of why private funds consistently outperform public markets.
The world of alternative investing platforms has exploded in recent years, making it easier than ever for accredited investors to diversify their portfolios with alternatives.
But many investors take a “spray and pray” approach to alternatives, investing in the likes of a fractional piece of art, a luxury watch, or even a bottle of fine wine. While these individual investments may be exciting, they don’t make for a strong investing strategy.
Instead, investors should invest in a diversified portfolio of alternative assets that have meaningful real-world economic value. This could include investments in real estate, venture capital, private equity, and hedge funds.
Many investors overlook the private markets when it comes to retirement savings. They stick with stocks and bonds, unaware of the potential of private markets to generate higher returns for retirement.
Dangerously, some retirement investors become aware of the ability to invest in individual stocks, cryptocurrencies, and other speculative investments within their retirement accounts. While this may be tempting, these investments are far riskier than relying on professional managers in the private markets.
Individual investors consistently underperform market averages by a wide margin. Investing in diversified private market investments within your IRA could help you generate higher, more consistent returns and build a more secure retirement.
Investors in the private markets are all too familiar with the pain of manually tracking portfolios in spreadsheets, managing a multitude of K-1 tax forms, and reconciling them with their taxes.
It’s time to get out of the spreadsheet cycle. In 2023, you expect a great online experience in every other part of your life–the same should go for alternative investing.
Accredited investors should look for online platforms that offer a consolidated view of their entire portfolio, automated tax management, and direct access to their investments. With Gridline, investors can get all this and more.
Investors may be tempted to invest directly in individual deals instead of funds. The truth is direct investing is far more dangerous than investing through a fund. When you invest directly in a deal, you are taking on an enormous amount of risk by putting your money into an illiquid asset with no diversification.
It’s also important to remember that most individual deals will never hit the returns you expect. Investing in a broad portfolio of funds is the only way to gain real diversification and potentially generate higher returns.
The United States saw an impressive bull market for over 13 years, and many investors are unaware of the risk they’re taking by not diversifying beyond U.S. borders.
There are around 6.1 million businesses in the US out of 333 million firms worldwide. Investors should diversify their portfolios to include investments in these non-U.S. markets, so they can benefit from the growth potential they offer.
Fees might not seem like a big deal, but they can eat away at your returns and even turn a winning investment into a mediocre one.
It’s essential to read the fine print and understand the fees associated with an investment before you commit your money. Many investors are unaware of the hidden fees, such as management fees and performance fees, that could cost significant amounts over time.
Gridline charges a management fee of just 50 to 100 basis points annually, with the fee varying based on total assets under management. This fee is well below an investor’s actual cost to evaluate and select managers. We also don’t charge carried interest.
Looking purely at a manager’s past IRR can be dangerous. It’s important to compare performance to a customized peer group of funds with similar investment styles and strategies. This allows investors to make informed decisions and select funds with the highest potential for success.
It is equally important to look at the people behind the funds, their process, and their philosophy.
Beyond performance entirely, it’s also essential to understand if a team possesses unique skills and capabilities, such as proprietary deal flow or special access to capital. Further, the team’s investment process needs to be repeatable; only then can the team generate consistent returns.
The team’s philosophy should also be consistent with a long-term outlook. Short-term speculation can often be a way to disguise the lack of excellent skills, while long-term investments are associated with better risk-reward outcomes over time.
The investing landscape changed dramatically in 2022. The extended bull market of the 2010s is unlikely to repeat, and investors need to adjust their strategies to serve them in a new investing environment.
These 10 New Year’s resolutions could help you strengthen your portfolio and make it more sustainable for the next decade and beyond. With Gridline, accredited investors can access top-quartile investments with low capital minimums, fee transparency, and greater liquidity.