Alternative Investments: What Are They and Should You Consider Them?

With investors facing headwinds such as higher interest rates, persistent inflation, and stretched valuations, many families are asking: what else is out there? The answer, for some, may lie in alternative investments.

Why consider Alternatives now?

• US stocks have enjoyed several years of strong performance which has led to high valuations in the US stock market
• Rising interest rates have led to a higher-than-normal correlation between bonds and stocks
• As we enter into a period of higher interest rates and potentially higher inflation, asset classes that do better in this environment are worth your consideration

Understanding the Landscape of Alternatives

Alternative investments are assets that fall outside the standard public markets. They can include:

• Private equity (ownership in private companies)
• Real estate (both direct and fund-based)
• Hedge funds
• Private credit
• Commodities and infrastructure
• Collectibles (art, wine, vintage cars -- though less common)

Why the wealthy look beyond stocks and bonds

What you should consider before Investing

Here are a few things to keep in mind:

1. Liquidity: With alternative investments, there is often limited liquidity. Sometimes, funds will have no liquidity until the fund liquidates. This lack of liquidity is communicated to investors before they invest into the fund. Other times, the fund may allow for quarterly liquidity, while maintaining the right to restrict the quarterly liquidations at any point.

2. Complexity: These investments often require deep due diligence and may involve sophisticated structures. Firms like Raymond James often have a team dedicated to performing due diligence on these investments before making them available to clients.

3. Risk: Like all investments, alternatives have risk. In my opinion, if a client wants to pursue alternative investments, it is best to build out a diversified portfolio of alternative investments to help mitigate the risks unique to each type of alternative investment.

4. Higher Minimums: Because of the above-mentioned characteristics of alternative investments, there are often minimum thresholds of wealth that an investor must be able to show before investing in alternative investments. These minimums can be thought of in the following categories:

1. Accredited Investor¹
   1. Subscriber, individually or jointly with spouse or spousal equivalent, has a net worth in excess of $1,000,000 (net worth includes assets, both liquid and illiquid, less any liabilities), excluding primary residence.
2. Qualified Client²
   2. Has a net worth, including assets held jointly with a spouse of $2,200,000 excluding primary residence.
3. Qualified Purchaser must meet the following³
   3. Individual Investor: Greater than $5,000,000 in investments as defined by the SEC.

My Role as Your Advisor

Let’s face it – Alternative Investments aren’t for everyone. But, for the right situation, they can open doors to opportunities that traditional markets simply can’t offer. My role is to help families evaluate alternative investments through a disciplined, long-term lens.

That includes:

• Educating on structures and risks
• Performing due diligence
• Aligning investments with your broader wealth and legacy goals
• Coordinating with tax and legal professionals

Alternative investments aren't about chasing the next big thing -- they're about creating optionality, diversification, and enduring wealth.

Final Thought

My clients use alternative investments as a complement to traditional stocks and bonds. Clients utilize these strategies for specific goals such as: Return enhancement, volatility reduction, income enhancement, etc.

If you're a family with $1M+ in investable assets and you've been wondering whether alternative investments make sense for you -- or how to access them -- I'd welcome the chance to have a conversation with you.

Sources:
¹According to Rule 501(a) of Regulation D promulgated under the Securities Act
²According to "qualified client" test of Rule 205-3 promulgated under the Investment Advisers Act
³According to Section 2(a)(51)(A) of the 1940 Act
Disclosures:
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. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value. © 2024 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2024 Raymond James Financial Services, Inc., member FINRA/SIPC.