Alternative Investment Vehicles for Phoenix Retirement Savers

Many investors, especially in times of uncertainty, rapid societal and financial change and inflation, seek out new or non-traditional avenues to grow or protect their portfolios. The traditional asset classes – stocks, bonds, real estate, cash equivalents and commodities – aren’t necessarily the only investment options for wealth generation. 

What Are Alternative Investments?

Any investment that falls outside the rubric of the five traditional asset classes may be considered an alternative investment. As with all other asset classes, there are inevitable tradeoffs savers must accept when pursuing alternative investment strategies.

Some of these alternatives may be less regulated, have higher barriers to entry, sacrifice safety for higher returns or lack diversification opportunities.

Investors should also keep in mind that some alternative investments are outside of the mainstream for a reason. While a handful of people may make a lot of money off these investments, there may also be many investors who lose money.

Private Equity

Private equity involves investing in privately held companies not listed on public stock exchanges. Investors can participate in private equity through various structures, including venture capital, growth equity and buyout funds. Private equity investments typically involve a longer holding period and are known for carrying higher risks and the potential to generate substantial returns.

There are some barriers to entry the average retail investor may not be able to clear. In general, a person must be an “accredited investor” – an individual with a minimum net worth of $1 million or have income in excess of at least $200,000 for the past two years. Private equity funds usually have their own rules for buy-in, like large minimum investments (often hundreds of thousands or even millions of dollars). 

Hedge Funds

Hedge funds share some of the exclusivity characteristics of private equity but with a more traditional collection of assets and fund management. There’s a diverse array of hedge funds focusing on a variety of sectors and asset classes, but a common feature is the practice of leveraging derivatives to amplify gains. 

The assets hedge funds hold can be on the traditional side of the asset spectrum and include things like stocks, bonds, commodities and currencies. There are hedge funds with reputations for deftly working the system to eke out gains even in falling markets – but these tactics (like leveraging futures) can be risky.

Like private equity, hedge funds are not available to all investors. Many require large initial investments that may only be appropriate for high-net-worth individuals.

Real Estate Investment Trusts (REITs) and Delaware Statuary Trusts (DSTs)

REITs and DSTs, if you want to consider them alternative investments, are some of the more accessible options. There are many exclusive and privately operated REITs and DSTs that work with individual investors to grow wealth through commercial, industrial and residential investment properties.

DST investors are all co-owners of the properties and share in the profits. These trusts are eligible for 1031 exchanges, meaning retirees might sell their existing investment real estate and reinvest in a DST (within a specified time frame) to defer capital gains tax since the government considers the DST a like-kind property.

These investment firms often don’t hold properties for very long. Proceeds from the sale of the properties are distributed among investors to either be reinvested in another DST property (to continue deferring capital gains) or to be taken as profit.

Commodities and Managed Futures

Investing directly in commodities involves buying physical goods such as gold, oil, natural gas and agricultural products or investing in futures contracts tied to these assets. The more traditional way retail investors add commodities to their portfolios is via commodity-focused mutual funds or ETFs, but the alternative is to purchase the commodities themselves or derivatives.

Those types of investments are not without risk, and successfully investing in futures or commodities requires significant knowledge, constant vigilance and the ability to make high-stakes decisions quickly.

Private Debt

Examples of private debt investments include private debt funds, business development companies (BCDs), peer-to-peer (P2P) lending, directed lending and syndicated loans. Private debt can offer regular income in the form of interest and principal payments but is also extremely illiquid and can come with high costs and risks. The average retail investor likely doesn’t have the assets or the know-how to easily invest in private debts, but they are an option with the potential to yield high returns compared to other fixed-income investments. 

Art, Collectibles, Cryptocurrencies, Classic Cars and Other Luxury Assets

There are a variety of niche alternative investments that some retirement savers choose to pursue based on their own personal interests and expertise. Unfortunately, enthusiasm and exuberance can lead to a false sense of security and overconfidence.

Cryptocurrencies gained significant attention as a potential investment vehicle over the past decade – but conventional wisdom and market trends can change rapidly with these asset classes. As of November 2022, investors of all types had lost an estimated $2 trillion from crypto and NFT crashes. 

Before investing in these types of alternative asset classes, it might be in your best interest to consult with an investment manager or retirement planner.

Should You Try an Alternative Investment?

Many investors become discouraged by anemic portfolio growth or losses due to market trends and volatility. Turning to alternative investments isn’t necessarily the best option for every investor, but each person and financial situation is different. If you’d like dispassionate and honest advice or input on your portfolio or investment options, consider speaking with a financial advisor at Fullerton Financial Planning. Call us at (623) 974-0300 for a consultation.