Alternative Investments Aren't Alternative Anymore
Once reserved for the ultra-wealthy and corporations, private market investments, also referred to as Alternative Investments, are soaring in popularity among financial advisors and their clients.
Companies like iCapital, CAIS and others brought the exclusive feel of investing in private equity, private debt, and private real estate to the masses. These platforms offer a variety of funds with low minimums. In some cases, only $25,000 is needed to invest alongside the ultra-wealthy to achieve “higher returns with less volatility than the stock market.”
Today, fundraising in private markets is easier than it’s ever been. Data company Prequin predicts alternative investments assets under management that totaled $13.7 trillion in 2021 will grow to $23.3 trillion by 2027.
Even BlackRock said the traditional 60/40 portfolio is dead and it needs an injection of alternatives. The company conveniently offers alternative investment products for higher fees than their index funds... are we shocked? Even so, money managers around the country are piling their client’s assets into alternative investments.
With all the noise about private markets, there’s two things we feel are important to note:
- If everyone’s doing it, it’s not alternative anymore – you know that feeling when you hear an awesome song for the first time and want to be the first to tell others about it? That was the alternative investment landscape a decade ago. But now, if you’ve responsibly saved for retirement, you’ll be hard pressed to find a wealth management firm not offering an alternative investments solution. To use the song analogy again - that cool song you heard… it’s a Taylor Swift song that’s been playing on the radio every day for the last year.
- Strong performance will be harder to replicate – Not impossible to replicate, but harder. The beauty of alternatives was its exclusivity. Smaller fund sizes made it easier to select winning investments and pass up on the losing ones. We believe the environment has changed. The reality is that no fund management company on the planet is going to pass on more Assets Under Management. When one fund fills up, they create another. The massive influx of cash presses the fund managers to find more investments. And to no surprise, some of them may not fit the traditional growth and return profile they’re accustomed to. This overcrowding in alternatives can lead to less-than-ideal performance, or worse – a valuation bubble.
Now, we don’t want to discourage all investors from private markets because there is a place for these holdings in a portfolio. But the attractive returns from the zero-interest rate environment are going to be difficult to repeat when the Fed has rates above 5%. Not to mention that the fees are high, and your investment isn’t liquid.
You need to ask yourself “is the lack of liquidity worth the risk and return vs. traditional stocks and bonds?” The S&P 500 from 2013 to mid-2023, averaged 12.39% annually (source: FactSet). Returns like this should satisfy most investors.
We encourage a long and well thought out conversation with your advisor prior to introducing alternative investments into your portfolio. In many cases, they are appropriate. But the exclusivity is gone… and perhaps the lofty returns.
- Brett Miller, CFA, CFP® – Financial Advisor
- Scott Miller – Senior VP, Investments
Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Brett Miller and Scott Miller and not necessarily those of Raymond James.
