The investment landscape is changing and many individual investors are looking to diversify their portfolios with assets other than traditional stocks and bonds.
According to research firm Preqin’s Future of Alternatives 2028 report, the global alternative investment market is expected to reach $24.5 trillion within five years, and will be worth about $16.3 trillion by the end of 2023.
Alternative products are now more accessible than ever to retail investors as fund managers expand their product offerings and significant changes are implemented.
What are alternative investments?
Alternative investments refer to multiple types of non-traditional investments that expose investors to private opportunities rather than public markets, says Megan Gorman, director of private and packaged solutions at RBC Wealth Management – US. says. The three main types of alternative investments are private credit, private equity, and private equity. Real assets such as real estate and agriculture.
These investments have attracted institutional investors for decades because they reduce portfolio volatility, increase returns, have the potential to provide income, and are not directly tied to stock market performance, Gorman explained. do.
Rebecca Harlow, product manager for alternative investments in the U.S. at RBC Wealth Management, says individuals who stick to traditional investment strategies are missing out on exposure to vast swaths of the economy.
According to S&P Capital IQ, more than 85% of U.S. companies with revenues of $100 million or more are privately held, a huge market for investors.
“If you understand the risks and have the help of an advisor, alternative investment funds can be a meaningful asset class,” Harlow explains. “It can provide exposure to assets that can be beneficial under a variety of market conditions.”
This means there is plenty of room for individuals to reconsider their allocations to alternative investments and determine whether there are unrealized opportunities that align with their financial goals.
Who should consider alternative investments?
Gorman says alternative investments aren’t suitable for everyone, but they can be a valuable tool for a variety of investors to achieve their goals.
“Many investors need income, and alternatives such as private credit strategies often offer higher yields than public markets,” she says. “High-income earners looking to build wealth for their growing families may find private equity attractive, and real estate funds offer a source of income from tenants and long-term growth. It could even be a hedge against inflation.”
Harlow said the alternative could also be a good option for younger, more affluent people who have the income to qualify as accredited investors but haven’t yet built up savings.
“They may want to start with an alternative investment fund that offers low minimums and some liquidity, and then move over time to more opportunistic strategies with lower liquidity and higher minimums. “I can’t,” she says. “You just need to make sure you understand the liquidity each investment provides and decide how much you can invest based on that. And just like any other investment, to get the most out of your portfolio. You have to be prepared to maintain your exposure for the long term.”
Improved accessibility
Until recently, alternative investments were primarily available only to institutional investors, Harlow said.
“Sponsors raising private funds often found it easier to rely on large institutional investors to write checks for $5 million or $50 million for a fund,” she says. “But over the past five to 10 years, these funds have started opening up to individuals and realizing that if they don’t expand their investor base, they’re leaving their money behind.”
By opening up their strategies to individual investors, fund sponsors are beginning to create a new world of funds that evolves beyond just lower minimums. These new structures often give investors access to markets dedicated to illiquid funds, such as private equity and direct lending, but lack the means to provide liquidity potential on a quarterly basis. used.
“These products capitalize on the idea that not everyone has a tax professional on their payroll to file for tax extensions or decipher the K-1 forms that typically accompany private investments. is also built on,” says Gorman. “It’s evolved and now the vehicles are available in the 1099 format rather than the K-1 format, which makes the taxes much less complicated.”
Alternative investment risks
While the value of alternative investment funds may be less volatile than investing in publicly traded companies, illiquidity is the biggest risk investors need to understand, Gorman said.
“Alternatives are meant to be long-term investments, not something you plan on exiting in one to three years,” she says. “You have to get used to the idea of going without cash while investing.”
Furthermore, the lack of transparency increases complexity and risk.
“Because these are private companies, the information is not available to everyone. You can’t just go online and get all the statistics and insights you need,” Harlow says. “Alternative investments are also not as tightly regulated as publicly traded companies, so additional due diligence is required to understand the opportunities and risks before investing.”
“Before investing in an alternative investment, it’s important to work with a knowledgeable financial advisor to see if it’s suitable for your individual circumstances,” says Gorman. “With an informed approach, alternatives can be a valuable addition to a diversified portfolio.”
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal agency, are not subject to deposits or other obligations or guarantees of any bank or bank affiliate, and are not subject to the following: are exposed to significant investment risks. Loss of invested principal.
Neither RBC Wealth Management, a division of RBC Capital Markets, LLC, nor its affiliates provide legal, accounting, or tax advice. All legal, accounting or tax decisions regarding your account and any transactions or investments entered into in connection with your account should be made in consultation with your independent advisors. Information provided by RBC WM, including but not limited to written materials, should not be construed as legal, accounting, or tax advice.
Investing in alternative investments is speculative, illiquid and may not be suitable for all customers. These are aimed at investors who meet certain criteria and are willing to bear the financial risks inherent in the investment. Investors should consider whether such investments are appropriate in light of their financial circumstances.
Alternative investment funds are sold only to qualified investors and only upon the provision of documentation containing information about the risks, performance and expenses of the fund and other important information. Investing in alternative investment funds is speculative and involves significant risks.
RBC Wealth Management is a division of RBC Capital Markets, LLC, a registered investment advisor and member of NYSE/FINRA/SIPC.
