What Are Alternative Investments, and How Do I Talk to Clients About Them?

By: Gridline Team | Published: 07/11/2022
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5 minutes

Over 200 years ago, a group of stockbrokers met under a Buttonwood tree on Wall Street to organize securities trading. This agreement evolved into the New York Stock Exchange, and today, public markets are the primary investment destination for most people.

The first bonds were issued just over 100 years ago, to help fund World War I. Now, fixed income investing is a key part of many portfolios. And in the past few decades, we’ve seen the rise of mutual funds, exchange-traded funds, and other vehicles that make it easy for small investors to get exposure to a wide variety of assets.

But what about investing in something other than stocks and bonds? These are often referred to as alternative investments, and they can take many different forms, including venture capital, private equity, hedge funds, and cryptocurrency.

Alternative investments can be an attractive option for sophisticated investors who are looking to diversify their portfolios and potentially generate higher returns. But they also come with some risks, which is why it’s important for RIAs to have a clear understanding of these assets before talking to clients about them.

Here’s a quick overview of alternative investments and some things to keep in mind when discussing them with clients.

Venture capital

Venture capital (VC) is a type of private equity that typically invests in early-stage companies. VCs are looking for high-growth potential investments, which means they’re often willing to accept more risk than traditional investors.

The VC model has been around for decades, but it’s gained more attention recently as a result of the success of companies like Uber, Airbnb, and Tesla. These examples are just scratching the surface, as VCs consistently outperform the market. Venture capital also has no correlation with the stock market, which means it can provide diversification for a portfolio.

One key thing to keep in mind with VC is that it’s a long-term investment. VCs may even invest in companies that don’t have any revenue yet, which means it can take years before they see any return on their investment.

Private equity: Another side of the coin

Private equity (PE) is another type of alternative investment that’s similar to venture capital, but with a few key distinctions.

For one, private equity firms typically invest in more established companies that are looking to grow through acquisitions or by taking the business public. And unlike VCs, PE firms more often use cash and debt in their investment.

Further, private equity can be a more hands-on investment than venture capital. Private equity firms may be actively involved in running the companies they invest in, which can provide them with more control over the outcome.

Historically, PE has consistently outperformed public markets, making it an attractive option for investors seeking potentially higher returns. PE has also been more resilient in downturns, which can make it a good hedge against market volatility. As we enter a period of economic uncertainty, private equity may become an even more popular investment strategy.

Real estate: The third pillar

Real estate is another popular alternative investment, and it can take many different forms.

Some people invest in physical property, such as office buildings, warehouses, or retail space. Others invest in real estate investment trusts (REITs), which are companies that own and operate income-producing real estate. And some people invest in real estate crowdfunding platforms, which provide access to a variety of different real estate projects.

Real estate can be a good way to diversify your portfolio since it’s not highly correlated with the stock market. And if you’re investing in physical property, you also have the potential to generate rental income.

Cryptocurrency: A new frontier

Cryptocurrency is a relatively new type of asset that has gained popularity in recent years. Bitcoin, the most well-known cryptocurrency, was created in 2009.

Cryptocurrencies are digital assets that use cryptography to secure their transactions. They’re decentralized, which means they’re not subject to government or financial institution control. And they’re often traded on decentralized exchanges, which makes them accessible to anyone with an internet connection.

Bitcoin and other cryptocurrencies have been volatile since their inception, but they’ve also seen tremendous growth. Bitcoin surged from around $1,000 in early 2017 to highs of over $20,000 by the end of the year.

Directly investing in cryptocurrency can be extremely risky, given the inherently volatile nature of the asset class. But there are other ways to gain exposure to the cryptocurrency market without buying digital assets directly, such as VC investments in mining companies or blockchain startups, or indirectly through a traditional investment vehicle like an exchange-traded fund (ETF). 

Offering the opportunity

For RIAs, alternative investments present an opportunity to differentiate your practice and offer your clients access to assets that they might not be able to get elsewhere. In a world with increasing economic uncertainty, rampant inflation, stagflation fears top of mind, and a potential market crash, allocations to alternative investments can help insulate portfolios and offer potential upside.

Private markets, for instance, have consistently outperformed public markets. And as we enter into an era of even poorer public market returns, many RIAs are turning to alternative investments to help their clients reach their long-term goals. The shift to alternatives is massive and ongoing. According to a recent study by Cerulli Associates, 60% of RIAs say they would increase their use of alternative investments if they were more liquid.

But it’s important to remember that these investments are not for everyone. They can be high risk and high reward, so it’s crucial that you only discuss them with clients who are truly interested in pursuing this type of investment.

At the same time, alternative investments can be a great way to deepen your relationship with clients and show them that you’re always looking out for their best interests. By taking the time to educate yourself on these assets and having thoughtful conversations with clients about them, you can position yourself as a trusted advisor who is always working to help them reach their financial goals.

Traditionally, alternative investments have been out of reach for most individual investors. Not only that, but cumbersome back-office details and lack of liquidity have made them difficult for RIAs to offer.

Gridline is changing that by providing an efficient way for RIAs and family offices to offer their clients high-quality, curated investment opportunities in non-correlated alternative assets. Gridline delivers access to these top-tier funds by leveraging the power of a platform that handles the back-office details — infrastructure, treasury management, performance reporting, tax requirements, and liquidity of the equities — saving valuable time that can be devoted to building their practices instead of vetting and managing private market opportunities.

If you’re an RIA who is looking for a way to offer your clients access to alternative investments, contact us today to learn more about how we can help you.

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Past performance is not indicative of future results. All securities involve risk and may result in significant losses. Investing in alternative investment funds is inherently risky and illiquid, involves a high degree of risk, and is suitable only for sophisticated and qualified investors. Investors must be able to afford the loss of their entire investment. Alternative investment funds should only be part of an investor’s overall investment portfolio. Further, the alternative investment fund portion of an investor’s portfolio should include a balanced portfolio of different alternative investments. Investments in alternative investment funds are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or limited liquidity. Investments in Alternative investment funds are generally highly illiquid and those investors who cannot hold an investment for the long term should not invest.

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