Note from Investopedia: FOX Business Network anchor Deirdre Bolton is an alternatives expert. On Monday, March 31, she will launch a new program, Risk and Reward with Deirdre Bolton, focused on alternative investments. Below she weighs in on five alternative investments for Main Street investors.
What are “alternative” investments? Everything outside the old 60/40 stock-bond mix. Today, with bonds yielding almost nothing and stocks looking fully valued by most measures, investors need more choices. Fortunately, they’re out there. For decades, the biggest institutional investors have used “alternatives” to generate higher returns, with less risk, than standard portfolios. Today, most of these strategies and asset types are available to Main Street, often through mutual funds or similar investor-friendly formats. But, like any investment, you need to inform yourself. My job on “Risk and Reward with Deirdre Bolton” is to help! I’ll have the best minds in the field to show viewers how these new tools can provide more ways to make money and better ways to keep it. Here are five alternatives that I’m asked about the most.
1. MLPs (master limited partnerships) can provide substantially higher income than investment grade bonds, and also tend to increase their payouts every year, which helps offset the risk of rising rates. Congress established these special vehicles in the 80s to spur investment in energy infrastructure, and that’s just what this rapidly expanding industry needs today: money for drills, pipeline, storage, etc. One key benefit: the payouts are tax-deferred if purchased in the right way. I’ll give more info on MLPs on our show.
2. “Long/Short” Mutual Funds: Many people are surprised to learn that the most popular hedge fund strategy is actually designed to be more conservative than classic stock investment. It’s called “long short"; a portion of the fund is dedicated to an insurance function: the “short” positions gain value if the stock market falls. (This feature gave rise to the term “hedged fund” in the 60s).
Today, several high-quality mutual funds offer access to this strategy but still provide all the usual mutual fund benefits, including daily valuation and liquidity. While these funds won’t keep up with the market during big bull runs, they should significantly outperform it on the downside.
3. Private equity has been the top performing asset class for big investors for a long time, but it’s been a tough area for regular investors to participate in. That’s changing. Aside from the relatively new opportunity to directly buy stock in Blackstone, Apollo or Carlyle, there are also publically traded BDCs (Business Development Corporations), which are run by the name brand PE Firms. (But, be careful with the non-traded variety of these, which often carry very high fees.) An important new trend is “registered privates,” which allow accredited investors ($1mm and up of net worth) to invest in big-name PE funds with as little as $50,000; just a few are out now, more are in the pipeline.
4. Most collectible asset classes -- memorabilia, jewelry, cars -- should be looked at as hobbies with an upside. We have fun with these on the show, but they’re really not suitable for people just looking for returns. Art may be an exception. It’s been recognized as a store of value for centuries in almost every civilization, and there are several high quality funds that specialize in the space (one even lends out its art to its investors). The trick is to invest behind someone who is both a true expert and an experienced, trusted fiduciary.
5. Angel Investing: This is an exciting but risky area. Most angel investors will tell you they expect a return ratio of one third, one third, one third. One third of his/her investments make money, one third go bust, one third plod along. But stats indicate that serious angels can achieve IRRs (Internal Rate of Return) of over 20%, which is obviously very attractive. Probably the best way into the field for new investors is to join a professional angel group (easy to locate through the Angel Capital Association) or to peruse sites like Gust.com and Angellist.com. If you’re going it alone, make sure a startup can clearly explain the problem they’re solving, the solution they propose, why their team can handle it, the size of the market, and what the competition looks like. Two more tips: the first money into a start-up should be from a small “friends and family” round (not from you!), which is used to develop a proof of concept you can evaluate. And the second is to be sure to keep more money ready for the next round, because the start-up will need it and maybe you will want to invest more so you are not diluted in later rounds.