Because shares of a private investment are not publicly traded, you avoid the volatility of public investments. Plus, your investment is also typically backed by a real asset. This a dramatic illustration, but the point remains, volatility kills the power of compounding. If you are buying fine wine or art, you directly own those bottles of wine or that oil painting. If you have bought a rental property, you directly own the home.
If you buy a mortgage note , you have a lien against a property. Or if you invest in a private fund, generally have direct ownership of whatever asset they purchase. If Aspen were ever to disappear, investors would still retain that ownership in the mortgage and the rights as a lender to the property. Alternative investments can also provide compelling tax benefits.
With many alternative investments you get to keep more of your profit because of the structure. In many private alternative investments, you become a part-owner of the fund or syndication and as such the tax benefits get directly passed on to you. The two most important tax benefits are pass-through depreciation and long-term capital gains treatment.
Many real estate funds or syndications deduct depreciation expense a non-cash expense from net income reducing taxable income. Aspen Funds uses pass-through LLCs of which investors become a part owner of. In our funds, a portion of the income is considered as long-term capital gains, which provides a very favorable tax treatment. Many investors are also unaware that you can invest in private alternatives with qualified retirement funds, such as a K or IRA.
Depending on how you structure the investment, you can grow your investment tax deferred or even tax free. Not all private alternative investments are cash-flowing investments — i. Many funds are structured to have a preferred return where the investors get paid first, in cash. Anyone who has tried to generate income from public investments, such as CDs, bonds or dividend paying stocks knows how difficult this can be. We routinely talk with investors who are struggling to generate cash flow in their portfolios, generally in the low single digits.
As already discussed, the public markets can be very volatile, increasing the risk just to generate a small yield. Read more about why cash flow may just be the most important feature to look for in investments. Most busy investors place a high value on their time, and actively managing an asset or portfolio requires an enormous amount of work.
After getting excited about the prospect of purchasing a single-family home as a rental or even maybe, a small multifamily apartment, they quickly realize how much work is involved and how large the learning curve is. But, again, because of the regulation changes there has been a whole new world opened up, many of which are completely passive. The other advantage of truly passive funds or syndications is that you can leverage the expertise, team, and relationships of experienced operators.
Real Estate Real estate has evolved into a multi-faceted asset class that includes publicly-listed and private real estate investment trusts REITs and private commercial real estate debt.
Real estate not only has a low correlation with equities, but is often viewed as a hedge against inflation. Hedge Funds Hedge funds are investment vehicles that use a range of non-traditional strategies e. Some of these non-traditional strategies include:.
These strategies generally leverage long and short positions within traditional asset classes. Managed Futures Managed futures is a trend following momentum investment strategy that uses quantitative signals to define when securities are trending.
Often, these signals compare the current spot price of an asset to the trailing historical moving average of the price and then make investments based on those trends. If the spot price is above the moving averages, then the security is in an uptrend, and vice versa. Global Macro Global macro strategies invest across asset classes and markets globally, taking both relative value and directional positions based primarily on broad economic and political analysis.
Systematic global macro strategies employ computer models to evaluate and predict market movements, while portfolio managers make buy and sell decisions within discretionary strategies. Major secular drivers could disrupt the global economy and financial markets over the next three to five years.
We share our views on risks and opportunities ahead. A glossary of terms to help guide investors through the key terms used in the private alternatives space.
Momentum, trend-following, managed futures - are terms that can seem intimidating and opaque for many investors. But, while these types of investment strategies may be less familiar than traditional strategies, they can be quite intuitive and offer attractive diversification and return potential that is worth getting to know.
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My Account Manage Subscriptions. Available Resources Glossary Test your Knowledge. Next Topic What role do alternatives play in a portfolio? Filters: Reset All. Filters X Close Filters Dropdown. As noted above, traditional stock and bond investing can offer investors the potential for growth and income. However, equities and fixed income allocations do not provide the accessibility to new or other distinctive exposures. The answer is simple: lack of access historically.
A second factor driving restricted access for individual investors to alternatives is that hedge funds, private equity, real estate and other such asset classes also have been characterized historically by high levels of illiquidity and long lock-up periods. For example, the direct purchase of commercial real estate not only requires significant resources, but also a commitment to a long holding period due to the illiquidity of the commercial property.
By contrast, individual investors disproportionately have greater needs for liquidity and, therefore, historically have tended to allocate to vehicles such as mutual funds, ETFs and other structures that provide daily liquidity. Hedge funds, for example, are not required by regulations to provide investors with the same level of translucence into their portfolio holdings, performance or other key evaluation criteria.
By contrast, mutual funds and other regulated investment structures are offered by prospectus and require their issuers to abide by a high level of transparency that helps ensure greater levels of investor protection. In recent years, liquid alternatives have emerged as a means of providing individual investors with the potential benefits of alternative investments, without the limitations of their historical offerings.
Specifically, alternative investment mutual funds can afford individual investors with potential benefits ranging from diversification, inflation protection, higher returns, and distinctive exposures that represent strong complements to their equity and fixed income investments. At the same time, such mutual funds do not require the high investment minimums, accredited investor status or the requirement to withstand significant illiquidity, as do most traditional alternative investments.
Moreover, as a result of their structure being regulated under the Investment Company Act of 2 and other regulations, mutual funds also ensure heightened investor safeguards that are critical for individual investor protection. One of the most game-changing developments historically for individual investment portfolios has been the democratization of investment management to open up access that enables individuals to invest in alternatives, just like institutional investors.
For individuals desiring the investment benefits sought and achieved for decades by pensions, endowments and foundations, allocating to liquid alternative investments may be an effective means of complementing core equity and fixed income holdings. Alternative investments can serve as an effective diversifier, a robust inflation hedge, a volatility dampener, and a means of accessing alternative exposures for growth and income.
More extensively available than ever, alternative investments are your path to invest like the institutions. Having a "short" position in a security means that you are selling a stock you do not own. This information is educational in nature and does not constitute investment advice. These views are subject to change at any time based on market and other conditions and no forecasts can be guaranteed.
These views may not be relied upon as investment advice or as an indication of any investment or trading intent. This content should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by AXS Investments or any third-party.
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