There is a growing interest among endowments and public pension funds in alternative investment funds and strategies.
Typically offering lower market correlation than traditional assets, these investments may help diversify your portfolio and protect against volatility.
Some examples include hedge funds, private equity, real estate, and commodities. With new technology, investing in alternatives has become more accessible for individuals.
The Nobel laureate Harry Markowitz famously stated that “diversification is the only free lunch in investing.” Diversification allows you to balance risk and return, maximizing the potential for greater returns by spreading your investments across various asset classes.
Alternative strategies, like hedge funds, private equity, and real estate, offer high yields, low volatility, and uncorrelated returns to stocks and bonds. However, such strategies have historically been reserved for institutional and ultra-high-net-worth investors.
Adding alternatives to your portfolio can provide access to these opportunities for more individual investors. For instance, a distressed debt strategy, such as acquiring stakes in airlines with financial difficulties, may offer solid returns for those prepared to hold for the long haul and potentially benefit from turnaround management.
Unlike the mutual fund industry, which pools funds for investments, alternative investment funds like David Adelman Darco Capital offer individual investors a direct ownership stake. They also have the flexibility to adjust their investments according to market conditions.
For example, they often invest in assets unaffected by a global economic downturn or market correction. This can help them weather a storm and protect your portfolio’s value.
Other benefits include lower stock market correlation and a way to diversify your investments. These are great ways to hedge against inflation and volatile price movements.
However, some alternative investment assets could be more liquid due to their unique structure. This can make it challenging to sell them quickly if you decide to change your strategy. It is also essential to perform thorough due diligence before investing in an alternative investment fund to avoid any issues. Traditionally, these assets are only available to sophisticated investors like institutions and high-net-worth individuals deemed accredited by the Securities and Exchange Commission.
Tax-efficient alternative investment funds can maximize investment returns and mitigate the impact of economic volatility. Private alternative investments have lower correlations to public markets and offer tax benefits, such as depreciation and long-term capital gains treatment. Investors can maximize the effect of these investments by strategically locating them within the correct account. Tax-efficient investments can be held in taxable accounts, such as brokerage accounts, or tax-advantaged accounts, such as IRAs and 401(k)’s.
But, even with the lowered tax rates, many strategies can still face high current income taxes, which detracts from their return potential. By placing these types of strategies inside a low-cost PPLI policy or PPVA contract, the annual insurance expenses can be less than 1% of the investment portfolio’s cash value, significantly improving the after-tax return potential of your alternative strategy. Depending on your investment goals, these alternative investments complement your diversified portfolio perfectly.
Most savvy investors know that investing in different asset classes is a smart way to safeguard their portfolio and diversify their assets. Alternative investment funds can help provide this diversification and offer a higher rate of return than traditional investments.
Due to their low market correlation with other asset classes, many alternative investments have a lower volatility than traditional stocks and bonds. They also can add a hedge against inflation.
Moreover, many alternative investment funds provide an opportunity to invest directly in projects that align with personal interests. This can be accomplished through private equity, real estate, and crowdfunding.
In the current environment of economic uncertainty, rising interest rates, and market volatility, alternative investments play a more significant role than ever before. As such, all investors and aspiring investment professionals need to understand their unique characteristics, advantages, and benefits. It is essential to recognize the value of these strategies as part of a holistic, long-term strategy for growth.