What are alternative investments?
Alternative Investments go beyond publicly traded assets such as traditional stocks, bonds and cash; some non-traditional offerings available to accredited investors can include Private Equity Real Estate (PERE), Qualified Opportunity Zones, Real Estate Investment Trusts (REITs), Hedge Funds, Venture Capital, Crypto, and digital assets.
Many alternative investments do not share the same market forces and regulations as traditional investments, creating a decoupling effect; for example, as stocks, bonds and mutual funds struggle, alternatives like real estate or crypto have the potential to do the opposite.
Many people invest in non-traditional offerings to create greater asset diversification and generate potential higher, long-term returns to support their wealth estate planning goals.
However, alternatives carry higher risks too.
For example, most commercial real estate (CRE) assets and funds typically require a minimum commitment of $25,000 to $100,000 to participate.
For many, this can be a significant amount of capital to commit at once, thus making accreditation a critical process to screen that investors meet the accreditation verification qualification.
Investors should consider their risk-return profiles before investing in any alternative opportunities.
Continue reading to learn more about alternative investments.
The Risk-Return Profiles of Alternative Investments
Alternative investments are non-traditional assets that provide unique opportunities, benefits and risks to investors that traditional investments like stocks, bonds and mutual funds cannot fully offer.
Private Equity Real Estate
PERE is an alternative investment that involves investing in properties such as a warehouse, apartment building, or office space. As real estate investments can be complex, most investors team up with a private equity firm to invest in and acquire real estate assets that can be improved, managed and sold at a higher value later.
Risk-Return Potential
Core, Core+, Value-Add and Opportunistic
One primary risk factor in PERE is the cyclical nature of the real estate industry. Real estate asset values are subject to change based on factors such as economic volatility, government regulations, geopolitical crises and other unforeseen events that may affect the market. Another risk factor includes managing the debt taken on to finance the purchase. Before committing capital, investors should perform proper due diligence on the company and fund manager.
One primary reward factor is the potential to generate higher returns on a long-term basis. Some of the potential benefits may include earning tax-efficient passive income streams. Additionally, real estate can give investors higher potential returns as the asset’s value can appreciate over time. Some PERE investments can generate 15-20%+ IRR annually, compared to the less than 10% IRR of traditional investments like bonds.
Qualified Opportunity Zones
Qualified Opportunity Zones (QOZs) were introduced in the Tax Cuts and Jobs Act of 2017, offering tax relief to encourage investment in areas requiring stimulus.
In 2018 there were some 8700 census tracts deemed as QOZs.
Risk-Return Potential
Opportunistic
One risk of investing in an opportunistic, QOZ fund, hypothetically, is that the new development does not attract new companies, employers and people to the area. As a result, the asset may not appreciate its estimated return on investment. As a result, investors must audit through numerous fund sponsors to gauge their track record history, leadership, investment ethos and more before committing capital to any investment.
The tax benefits returned are unique and not found in any other investment program in the country. For example, after holding the investment in the fund for a 10-year period, investors are not taxed on any of the capital gains earned during that time. Another benefit to note is that the taxes owed on any capital gains rolled over into a QOZF, within 180 days, can be deferred for up to five years.
Real Estate Investment Trusts (REITs)
The risk-return profile of a REIT depends on the type of properties it owns, its financial structure, and its management team. Generally, REITs offer a combination of income and capital appreciation potential, but investors should understand that REITs can carry varying levels of risk.
Risk-Return Potential
Core, Core+, Value-Add and Opportunistic
Typically, rent payments to a REIT fund provide the primary passive income source. During economic uncertainties, the income generated by multi-family assets structured by long-term leases, and in some cases hospitality and retail, can provide a stable hedging tool for investors looking to protect their portfolios and support their wealth estate planning goals.
Investing in a REIT fund holding a diversified portfolio of real estate assets is generally more fortified, which can help investors reduce their risk exposure to bear market trends compared to single asset offerings.
However, these income streams are subject to varying market conditions like rising interest rates, inflation, and other macroeconomic factors impacting the real estate market. These conditions can negatively impact occupancy rates and rental income, which may result in a decline in dividend payments.
Venture Capital
Venture Capital (VC) refers to the type of private equity financing provided to early-stage and high-growth startup companies in exchange for equity or an ownership stake in the company.
Risk-Return Potential
Opportunistic
The risk-return profile of venture capital is high-risk / high-reward as early-stage startups are riskier than established companies, as they have not yet proven their business model, developed a customer base or generated revenue. Additionally, startups face significant competition, and many fail to generate profits or survive.
To compensate, investors can typically expect higher returns than most traditional and alternative investments. One caveat is investors may not see any returns or profits until the startup is acquired or goes public, which may never happen. Investing in early-stage companies often requires long-term buy-and-hold strategies, as it could be years before any profits accrue.
Crypto and Digital Assets
Investing in cryptocurrency and digital assets such as Bitcoin, Ethereum, Non-Fungible Tokens (NFTs) and other alternative cryptocurrencies can provide high potential returns but come with significant risks and notable volatile swings.
The backend infrastructure of crypto and other digital assets lives on various blockchain networks secured by individual nodes globally. This creates a decentralized network that sets itself apart from centralized networks, which means that one entity controls the on/off switch to its servers. This is how the internet works today. A few hedge funds own most brands, companies, media, products and people under their business umbrella. They control what you can and can’t see online, and can cut access to payment systems and other essential data to everyday people at the snap of their fingers. A decentralized future craters the control that centralized powers have over the global population.
Mass adoption of blockchain is inevitable because it harnesses data in an incorruptible, immutable, anonymous and transparent ledger. It’s already disrupting industries across all spectrums and its use cases are many.
Blockchain is developing innovative payment systems that provide financial accessibility to underprivileged populations. It’s already tokenizing deeds of houses, automobiles and other items that require proper registration. It’s helping healthcare providers secure patient data and HIPPA rights. It may be a solution to ensuring that our voting institutions are secure and transparent during state and federal elections, as our voting systems are overtly untrusted and over politicized today. Blockchain can fix all of this.
Risk-Return Potential
Opportunistic
The risk profile of crypto and digital assets is mainly driven by their decentralized and unregulated nature, making them highly volatile and unpredictable. Factors that can impact the returns of cryptocurrencies include government regulations, media attention, and public perception.
Crypto and digital assets aren’t regulated (yet), and the market is heavily influenced by investor sentiment and demand, leading to significant price swings.
Additionally, investors need to consider the cybersecurity risks associated with cryptocurrencies, including the risk of hacking and malware attacks which can result in loss of value or even loss of assets altogether.
Furthermore, some cryptocurrencies have been associated with illegal activities such as money laundering and terrorism financing, making them riskier investments.
On the other hand, the returns of cryptocurrencies and digital assets can be significant. Due to their high volatility, investors can potentially profit from price fluctuations in the market. Furthermore, as the adoption of cryptocurrencies increases, their liquidity and demand increase, which can result in significant returns for investors.
Conclusion
Alternative investments offer a broad range of investment opportunities that can provide high returns with high risks. Traditional investments like stocks and bonds typically offer comfort and security, but diversifying an investment portfolio with alternatives has the potential to create additional investment opportunities, increase returns, and reduce risk.
Nonetheless, investors must consider the overall investment strategy, research the risks, and consult a financial advisor before investing in many alternative assets. A successful investment strategy is diversified, comprehensive, and well-researched to mitigate risks and maximize returns.
Alternative Investments go beyond publicly traded assets such as traditional stocks, bonds and cash; some non-traditional offerings available to accredited investors can include Private Equity Real Estate (PERE), Qualified Opportunity Zones, Real Estate Investment Trusts (REITs), Hedge Funds, Venture Capital, Crypto, and digital assets.
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About Caliber
Caliber is a leading vertically integrated asset management firm whose primary goal is to enhance the wealth of investors seeking to invest in middle-market assets. We strive to build wealth for our investor clients by creating, managing and servicing proprietary products, including middle-market investment funds, private syndications, and direct investments. Our funds include investment vehicles focused primarily on real estate, private equity, and debt facilities. We market our services through direct sales to private investors, wholesaling to investment advisers, direct sales to family offices and institutions, and in-house client services. Caliber’s middle-market specialty allows the Company to compete with agility and speed in an evolving arena of alternative investments. Additional information can be found at Caliberco.com and CaliberFunds.co.
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If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
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Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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