Alternatives have long been the preserve of the wealthy and well-connected, but that may be about to change. The SEC is considering making it easier for average investors to access these investment vehicles.
There are good reasons for this. Alternatives can offer higher returns and a lower risk profile than traditional investments. They can also provide diversification benefits, which is especially important in today’s volatile markets.
If the SEC goes ahead with this plan, it will democratize access to alternatives and open up a whole new world of investment opportunities for Main Street investors.
Higher returns and lower risk
Alternative investments encompass a wide range of asset classes, including private equity, real estate, venture capital, hedge funds, and commodities.
There is growing evidence that alternatives can indeed offer higher returns and lower risk profiles than traditional assets such as stocks and bonds. For instance, a recent study by McKinsey highlights that, by practically any measure, private equity outperforms public market equivalents.
Why alternatives outperform
So, what explains this outperformance? First, alternatives offer diversification benefits. For instance, private equity tends to be less correlated with stocks and bonds than traditional assets, which means it can help reduce overall portfolio risk.
Second, alternatives tend to be less inefficiently priced than traditional assets. In other words, there are more opportunities for alpha generation in the alternative space.
Third, alternative managers often have a longer time horizon than traditional asset managers and are thus able to take a more patient approach to investing. This can lead to better returns over the long term.
Fourth, alternative investments tend to be managed by specialized teams with deep industry expertise. This allows them to generate superior returns by making more informed investment decisions.
Finally, many alternative investments are not subject to the same regulatory constraints as traditional assets. This gives managers greater flexibility in terms of how they deploy capital, which can again lead to better returns.
The SEC’s Regulation D amendment
On August 26th, 2020, the SEC amended Regulation D to expand the definition of accredited investor. This is a much-welcomed move that will enable more investors to boost their returns and lower their portfolio risk. Prior to the amendment, only those with a high net worth could participate in most private offerings of securities.
Now, a wider range of investors will be able to qualify. For one, those who attain certain professional certifications – Series 7, Series 65, or Series 82 – will be eligible. Also, knowledgeable employees of certain private funds can now qualify, as can family clients of family offices.
Perhaps most importantly, the amendments create several accredited investor categories for entities. This includes investment advisors registered with the SEC, state-registered investment advisors, exempt reporting advisors, rural business investment companies, and limited liability companies with more than $5 million in assets.
The SEC’s actions will go a long way toward democratizing access to alternative investments. This is a positive development for both investors and businesses that rely on private offerings to raise capital.
As Bloomberg Law reports, the SEC is considering further expanding the definition of accredited investor in order to address diversity, equity, and inclusion (DEI) concerns. This is a welcome move, as DEI has been sorely lacking in the financial industry.
To take advantage of this new opportunity, many investors will turn to digital wealth platforms like Gridline. Gridline provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
The SEC’s actions will go a long way toward democratizing access to alternative investments. This is a positive development for both investors and businesses that rely on private offerings to raise capital. With Gridline, even more, investors will be able to take advantage of these opportunities and boost their returns while diversifying their portfolios.