Despite the recent debacle over cryptocurrencies, some advisors are recommending other sorts of alternative investments for their everyday retail clients. It’s become easier to access these largely unregulated assets, but are they really a good idea for retail investors?

What Are Alt Investments?
For the most part, alt investments are assets that aren’t publicly traded the way stocks, bonds and even currencies are. In the past, they were only available to institutional investors and accredited individuals—i.e., those people classified by the SEC as qualified to invest in complex or sophisticated types of securities because of their wealth or some other reduced need for regulatory protections.

Broadly speaking, alternatives include private equity, private debt, venture capital, hedge funds, managed futures, commodities, derivatives, real estate, and tangible assets such as antiques and art.

The Appeal Of Forbidden Fruit
The temptations are enough to make any investor’s mouth water.

“In the past 10 years, venture capital investments have returned in excess of 22% annually, and private equity has returned in excess of 17% annually,” said Michelle Connell, president and CIO of Dallas-based Portia Capital Management, citing figures from JPMorgan and Bloomberg. In contrast, the average annual return of the S&P 500 over the most recent 10-year period was about 8.3%.

Still, these investments aren’t right for everybody.

Alt Funds
Often, the easiest way to access alternatives is through dedicated mutual funds and exchange-traded funds. Alt mutual funds operate “just like any other mutual fund—you can easily buy and sell them, incorporate them into model portfolios and rebalance them,” said Jeff Nauta, a principal and chief compliance officer at Henrickson Nauta Wealth Advisors in Grand Rapids, Mich. “Because mutual funds offer daily liquidity, they are generally only going to focus on the most liquid alternative classes.”

A less liquid option is the interval fund, a closed-end fund (with a fixed number of shares) that has a high minimum investment (usually $10,000 on up) and high expense ratio. Interval funds can invest in almost any type of alternative asset, and some have applied to the SEC to become more publicly available.

“Generally, you can buy an interval fund on a daily basis but can only redeem shares on a quarterly basis,” said Nauta. This lack of liquidity, however, can also mean higher returns. “Because they can invest in less liquid assets, interval funds can provide access to a broader range of uncorrelated sources of return,” he said—meaning the investments won’t perform in lockstep with mainstream capital markets.

Private Alt Funds
Nowadays, retail clients also have access to a variety of private funds. Essentially, these are “feeder funds,” said Nauta, which channel money to investments that normally require high minimum investments.

If you’re not ultra-wealthy, the way to access these private funds is through a technology platform. For a fee, these platforms are able to accept lower minimum investments because they pool capital from different investors.

Technology Platforms
For instance, New York-based iCapital is a technology platform that recently announced a suite of private equity funds “specifically tailored to the lower end of the high-net-worth investor profile,” said Steve Houston, the firm’s managing director and head of investment products.

These funds, he said, “offer strong diversification, have lower investment minimums than traditional private equity funds, and have near-term distributions [meaning your money isn’t tied up for years on end], all of which are characteristics that are important for wealth managers who are working with clients a little farther downstream” from the ultra-wealthy.

CAIS, another New York-based fintech company, provides access to hedge funds, private equity, private credit, structured notes, digital assets, real estate and a variety of other alternative assets. In addition, it assists advisors in creating their own customized alt funds.

Diversification Benefits
Andrew Snyder, a director in product and research unit at CAIS, said alternative assets generally offer diversification benefits.

Private equity funds, for example, frequently outperform their publicly traded counterparts, he said, while hedge funds can provide protection during economic downturns. “Specific alternative investments can often be utilized to solve for specific portfolio outcomes,” he explained, “such as enhancing returns, diversifying risk and supplementing income.”

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