al-ter-na-tive: adjective. Available as another possibility
blend: noun. A mixture of different things or qualities
At The Bahnsen Group, we are fortunate to have a group of very avid writers who cover everything from financial-market and macroeconomic insights (David Bahnsen’s Dividend Cafe) to financial empowerment for women (Kimberlee Davis’s Fiscal Feminist), financial “straight talk” (Trevor Cummings’ Thoughts on Money), and even non-investment-related services and solutions (Don Saulic’s The Financierge). All of these writings can be found at the Get Smart section of our website. In considering where I may help round-out an already robust content offering, the world of Alternative Investments seemed to be the natural fit. After all, “alternatives” – and more specifically, private investments – are an area for which I’ve developed a passion that has led me to pursue additional education and investment solutions on behalf of clients in recent years. This undertaking has been, in part, due to our industry creating more “investor-friendly” access to such strategies. This blog may also be an outlet for alternative perspectives on traditional finance areas, but time will tell. Overall, the goal will be to impart relatively short and interesting nuggets of information that you’re not getting elsewhere. Here we go.
What are Alternatives or Private Investments …and Why Are They Used?
Starting with the most basic questions, let’s first set the record straight on what is implied by both “alternatives” and “private investments.” An alternative investment is commonly defined as anything that doesn’t fall into the conventional categories of stocks, bonds, and cash. However, that definition doesn’t get at the crux of why we use alternatives in the first place: they are expected to behave differently from conventional investments from a risk/return perspective. Private investments are a subset of alternative investments where the underlying holdings or transactions cannot be accessed via publicly traded markets; therefore, they inherently involve a greater degree of illiquidity.
Very simply speaking, alternatives are used to diversify a portfolio beyond what can be accomplished via stocks and bonds; but, no one cares about diversification for diversification’s sake. Instead, the goal is to increase portfolio growth/income and/or reduce volatility (usually both) by adding these other investments with low correlation to conventional assets. The various structures, strategy types, and large number of alternative managers will give us plenty of topics to cover in the future. Still, one takeaway from this initial discussion is that there is a daunting amount of education, research/analysis, and due diligence that can go into constructing an allocation to alternatives.
Examples of Alternatives
As alluded to above, there is an exhaustive menu of investment approaches that may fall into the alternatives bucket: some high-level examples include long-short equity, private credit, private equity, managed futures, volatility strategies, merger arbitrage, insurance-linked strategies, private real estate –and there are many variations within each of these areas. Some investments, like private real estate, are prevalent, but many other strategies have historically been unavailable to most investors, as they legally require income and/or net worth qualifications because of their fund structures. However, an ongoing evolution of investment structures and technologies has continued to make access increasingly widespread, making Alternative Blend a (hopefully) very relevant tool to gain insights into the less-discussed components of one’s portfolio. In upcoming editions, we’ll talk about some of the basic structures (e.g., hedge funds, private equity, interval funds), why they exist, how they’re used, and – perhaps most notably in this ongoing COVID-19 pandemic – how they’re reacting to a total disruption of the global economy as we knew it until February of 2020.
Until next time, this is the end of alt.BLEND.
Thanks for reading,