💰 Investing In Alternative Assets

I’ve always been fascinated by how wealthy people invest their money, and one common component of their portfolios is Alternative Assets, which I want to explore in today’s post. This interest was sparked after a conversation with Tad Fallows last year (🎧 Ep 87). Tad co-founded Long Angle, an online community for high-net-worth investors to discuss various topics, including asset allocation, taxes, philanthropy, insurance, raising kids, and more. I’ve been a member for the past year and have really enjoyed being a member.

Every year, Long Angle releases a benchmarking survey that uncovers the financial habits and attitudes of the wealthy. Among many interesting takeaways, there was one that drove me to write this newsletter.

So I wanted to dig into those and for the sake of the email, will be combining both into “Alternative Assets.” Also, this email is certainly not intended to be financial advice, and some examples shared may not be available or suitable for the average investor. Personally, I haven’t invested in the majority of them, but I still enjoy learning about all the different types of investments out there, so I hope you do as well.

And if your investable assets exceed $2.2 million (including illiquid investments, but excluding your primary residence), I encourage you to consider joining Long Angle (it’s free). I’ve learned so much from their community and try to contribute my thoughts as much as possible.

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🔍  Exploring Alternative Assets

Alternative assets is a term that aims to capture investments that don’t fit into conventional stocks, bonds, and cash. You might often hear about cryptocurrency, private equity, hedge funds, collectibles, or commodities as common examples. Some people might classify real estate as an alternative asset (since it’s not a stock, bond, or cash), but since it’s so well-known, I’ll keep it out for this email.

The key considerations for alternative assets are that they often have fewer regulations, lower liquidity, and are harder to value. These are some tradeoffs investors take for the higher risk/reward that many alternative investments have.

I’ll group them into three categories:

1. Equity Alternative Assets

2. Commodity Alternative Assets

3. Other Alternative Assets

Note: The information below is not a comprehensive list of every alternative investment available. It’s designed to introduce you to some different assets you might not know.

Equity Alternative Assets

Equity alternative assets cover investment in private businesses. If you invest in most stocks, you’re investing in public equities that trade on a stock exchange, but the examples discussed here are not traded on public markets.

• Angel investing provides capital to startups and entrepreneurs at the business’s earliest stages in exchange for equity. It’s a strategic bet on the idea, team, and potential impact. It’s even possible the business doesn’t have any customers or revenue. The purpose of the investment is to fund innovation and fuel growth. With angel investing, it’s often the investor's personal funds, whereas the options below are pooled funds.

   

  Note: Despite working in venture capital, I’m still quite reluctant to angel investment because I’ve seen many companies fail (from people I’ve known to be extremely smart). It’s a challenging game where I think it’s best to go in expecting to lose everything.

• Venture capital fund investing is similar to angel investing. The difference is that VC funds are pooled investments in various companies at multiple stages in their lifecycle. The funds access the capital to buy these companies from a network of high-net-worth investors or limited partners (LPs). Firms like Sequoia and Andreessen Horowitz are some of the biggest names. Investing in VC funds is technically less risky than angel investing because businesses are often at later stages with a more defined operating model and investments are spread out across many companies (however, it’s still risky in the grand scheme of investment options). Unfortunately, it’s very difficult for most individuals to get access to investing in the best VC funds.

• Private equity is an investment of growth capital into a business to help them restructure to accelerate growth. Private equity firms typically invest some of their own money (from investors/LPs) and borrow the rest. Most of the time, the firm’s investment strategy is to sell the company at a higher price, but sometimes it’s to return the profits to investors. Like VC funds, it’s not easily accessible, requires a high minimum, and PE funds often have high fees.

• Search funds are less well-known but have historically had some of the highest returns among all asset classes. It’s an investment vehicle where an entrepreneur receives financing and guidance from investors to search, acquire, and manage a private company. An example is an MBA graduate who spends a year or two looking for a small company to buy, seeking financial backing from investors to cover their expenses during that search window. Once a company is identified, the investors buy it from the founder and aim to improve the operations before selling it to another private equity firm. 

The four examples above all take the lens of the initial asset purchase. But what if an investor wants to sell? Since these investments are illiquid, it’s not as easy as the public markets, but there is a market for secondaries. It refers to selling existing assets or securities that do not have day-to-day liquidity. An investor can sell their investment to another investor, likely for a discount on the asset’s market value. 

• Equity financing is a way to provide loans to individuals that want to tap into their valuable (but illiquid) assets, like private company stock. For example, an early employee at a growing private company may want to exercise their stock options. But exercising an option requires capital, sometimes a lot more than the employee has on hand. An investor can provide a loan to bridge the gap and receive a fraction of the options upside in exchange.

Category #2: Commodity Alternative Assets

Commodities are basic goods interchangeable between producers, such as gold, silver, wine, oil, or natural gas. As an asset class, they are highly speculative and especially sensitive to economic shifts.

• Precious Metals is investing in metals typically to hedge against inflation or their demand for use in advanced electronics. This might be the most common or well-known form of alternative investments and are much more accessible than some of the options listed throughout. Investors can buy the physical state, future contracts, or mutual and exchange-traded funds.

• Cryptocurrency is a digital currency and one of the most accessible alternative assets. While major tokens like Bitcoin and Ethereum are available on major exchanges like Coinbase, many smaller tokens are purchased with a digital wallet you manage/store yourself. Despite its accessibility, Crypto is much less regulated than stocks or bonds. The collapse of FTX, BlockFi, Celsius, and others should be a reminder of the risk that comes with these investments.

• Fine Wine & Rare Whiskey is investing in the physical product or a pooled fund that holds an array of these goods. Investors can provide capital at the pre-production stage or years after it’s already been bottled. There are many factors to consider (scarcity, vintage, aging potential), but many investors just focus on strong business models and good operators.

Category #3: Other Alternative Assets

Other alternative assets serve as a catchall to the many highly unique investments. Here are a few interesting examples.

• Private Credit means making direct loans to companies or real estate developers. Borrowers usually are too small to issue bonds, and are unable to access traditional bank loans for all of their financing needs. Private credit loans are often relatively short-term and carry interest rates in the mid-teens. Security can come in terms of real estate collateral, corporate guarantees, and personal guarantees from borrower executives.

• Athlete revenue share: An individual could offer financial support to an amateur athlete in return for a stake in future earnings as a professional player. Since amateur contracts are much lower, investors could support a promising amateur and receive a percentage of the player’s professional future salary. However, the investor would lose their investment if the player never makes it professionally. 

• Trading Strategies aim to exploit pricing inefficiencies to generate profit without reliance on underlying market growth. These strategies can operate in any large liquid market, from forex and crypto to stock, bonds, and commodities futures. Trades are often very short-term, and can exploit historic patterns, mismatches between exchanges, or other strategies. Be aware that trading strategies are particularly risky from a fraud and leverage perspective, and identifying good partners is challenging.

• Viatical Settlement: An individual can invest in someone else’s life insurance policy. They would assume the premium and receive the death benefit when they pass away.

• Farmland falls under the real estate alternative umbrella. Since farmland is best designed for practical use, it’s typically rented to a farmer. It’s historically a lower-risk, lower-return alternative, and the yield can be more predictable. The edge cases where an investor might see more rapid appreciation in land value is when the land is situated near an expanding urban area. 

• Collectibles are assets like art, watches, or baseball cards. These assets do not generate a consistent cash flow and can be tough to value. While online marketplaces like eBay have made valuing some collectibles easier, many still have very niche markets that are very difficult to value. 

☑️ Who Qualifies?

Eligibility depends on the asset class, but many require you to be an accredited investor or qualified purchaser.

• An accredited investor is one whose financial sophistication warrants a reduced need for protection from unregistered securities. They must have earned at least $200k ($300k with a spouse) in the last two years, have a net worth exceeding $1M, or meet specific financial officer requirements.  

• A qualified purchaser is an accredited investor or a family business with an investment portfolio valued at $5 million or more.

🖥️ Online Platforms for Alternatives

Online investing platforms have made it much simpler to access alternative investments. You can invest without needing personal relationships or writing large checks since it’s digitally managed and funds are pooled. They also often have lower minimums, and some don’t require you to be accredited. There are a variety of options in many areas of alternative assets:

Some examples of online platforms include:

• Masterworks provides clients access to blue-chip art and I’ve personally invested in 14 different pieces of art on the platform (which you can see here). They’re also a sponsor of show and have offered to give all subscribers priority access to skip their waitlist.

• Long Angle has curated deal flow across all alternative asset classes.  You must be a member to participate, but membership is free, and they’ve offered priority access to join for our subscribers.

• Vinovest provides access to invest in wines from around the world.

• Yieldstreet provides access to hedge funds and debt investments across various private market deals, including real estate, commercial, marine, legal, and art investments.

• Fundrise provides access to real estate and venture capital.

• WithVincent is a professionally-managed investment service that provides access to art, collectibles, crypto, private credit, real estate, and pre-IPO ventures.

• Rally provides access to equity shares in collectibles.

Another way to source alternative pooled deals is by networking with people in the industry that are knowledgeable and experienced. There are also many ways to pool resources and reduce minimums amongst like-minded investors, like forming a special-purpose vehicle.

⚖️ How Much Should I Invest in Alternatives?

Most professionals recommend investing no more than 5%-10% of your portfolio in alternative assets, but it’s totally fine for you to have the answer be 0%.

While I haven’t explicitly said it yet, you have to weigh your risk, financial situation, and minimums required that come with these types of investments. Fortunately, I’ve also been able to ask this question to many financially-gifted minds on the podcast and aside from the conversation with Tad Fallows (🎧 Ep 87) that shaped a lot of this newsletter, here’s what they’ve shared.

• Ben Carlson (🎧 Ep 42) suggests putting your financial house in order before anything else. That means doing all the boring stuff first, and then, only then, investing in alternative assets, maxing out 5%-10%, where it doesn’t get out of control. 

• Nick Maggiulli (🎧 Ep 59) focuses on cash flow-producing assets but believes there can be a place for investable assets in alternatives like crypto, art, and private companies. Keep it small. 

• Andy Rachleff (🎧 Ep 19) doesn’t believe in speculation. But he also knows that psychology prevents people from avoiding speculation altogether, so he suggests keeping it a tiny percentage of your portfolio if you choose to do so.

• Joe Saul-Sehy (🎧 Ep 35) compares alternative investing to stock picking because, to succeed, you must do your research. When you’ve gathered enough information, you’ll reach an inflection point in the analysis that will prompt you to believe it. 

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Editor’s Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.