Most financial professionals would agree that it’s not easy to concisely describe Alternative Investments. A friend of mine working at one of the large Mutual Fund companies refers to them as “private investments that have less than transparent legal structure than many traditional investments.” In most cases these are investments that are not suitable for the average investor due to their complexity. Since most Alternative Investments (AI’s) are sold as “Private Placements,” they are generally only available to wealthy and experienced investors. I would consider them as any investment that isn’t usually part and parcel of a traditional or conventional portfolio. The thinking behind investing in AI’s is generally to allow for greater diversification, especially when considering those investments aren’t closely correlated with the more traditional investments. Correlation as a factor in the construction of diversified asset allocation portfolios has taken a beating since 2008, but in my book it’s still relevant. I also tend to look more closely at the risk vs. reward tradeoff involved with one’s investment decisions and asset allocation plan. Take note, be careful when reading a prospectus and comparing nominal dollar returns as compared to those that are inflation adjusted. The bottom line is that an Alternative Investment’s expected risk characteristics will usually differ from those of traditional investments. That’s why many investment managers will employ AI’s as an investment strategy to try and produce higher returns within a given investment universe.
Take special note – practically all AI’s are privy to more flexible regulation. Most are not regulated by the SEC or FINRA, and AI Managers are not required to guarantee these investments provide liquidity or diversification. Your Financial Planner should advise you that only those individuals with a net worth of at least $1 million, and a minimum annual personal income of at least $200,000, can invest in these types of investments. The aforementioned is really the only guideline(s) set forth by the SEC.
Alternative Investments include the following:
- hedge funds
- partnership vehicles (limited partnerships) – including private equity, private debt, R.E., oil, gas, timber
- managed futures funds
- private equity offerings
- commodities i.e., precious metals
- currency funds
- and other funds that use derivatives including options, straddles, and leaps
Author’s Note: Please consult with your CFP®, CPA and/or Estate/Tax/Eldercare Attorney when discussing your financial needs and developing the appropriate personal/business financial plan.
John Politi is Executive Director of the Jewelers for Veterans Foundation, a 501(c)(3) Non-Profit, dedicated to connecting US Military Veterans with training & employment in the jewelry industry – www.jewelersforveterans.org. He holds an MBA in Financial Management, MBA-Advanced Certificate in Health Care Management, Series 65 (Investment Advisor Representative), and successfully completed the required CFP® Financial Planning Educational Program. John would enjoy receiving your feedback and/or questions in regard to your Financial Planning activities, especially, Defined Contribution Programs (401K), 403b, 457, and Pre/Post Retirement Planning – both personal and business. He enjoys active membership with the Financial Planning Association-Greater Hudson Valley, NY, serving on their Pro Bono Committee, as well being a member of ACHE, Healthcare Leaders of NY Chapter, and the 24KT Club of New York. John welcomes your input and can be contacted at, firstname.lastname@example.org , or telephone 212.600.2475.