There could be a big shift around how clients get information on alternative investments. Two trends may make word of mouth overtake influencers making content about finances.
While alternative investments can be helpful in diversifying portfolios and balancing risks, lately advisors may feel like they are pulled in multiple directions. That could be due to the underperformance of traditional alternative investments in 2023, leading clients to push for new options. A desire for better performance may explain the risk in interest in direct investing and cryptocurrency - despite the difficult years crypto has had recently. Clients may be asking for alternative investments, but not necessarily fully grasp what that means. For example, they may have heard the results of alternative investments by large institutional clients and think they are missing something. We have often said that before diving into any discussion of alternative investments with clients, understanding a client's interest and knowledge of alternative investments is a key starting point. By definition, an alternative investment is one that is to state the obvious, one not made in traditional avenues. That is, one that is not in stocks, bonds, or cash.[1] Some investors rather than reaching first for alternatives such as real estate, cryptocurrency, or specific commodities may be seeking what they have called alternative investments but instead need to consider investments within asset classes.
We noted recently that when clients think of alternative investments, they usually are seeking investments that have different growth trajectories than their stock-based investments, allowing them to spread risk.[2] We classify alternative investments into three main groups: Private Equity, an illiquid asset class that seeks long-term appreciation away from public markets; Hedge Funds, investments that have broad flexibility in the types of strategies they can employ to follow their stated investment objectives; and Commodity Pools, enterprises that attract funds from people who are looking for pool managers to engage in commodity-related trades.
However, performance is paramount for any investment, be it traditional or alternative. So, how do the current trends in alternative investment measure up? In the recent past, we have discussed micro-equity, microfinance, real estate, and cryptocurrency.
One new approach we’ve noted has been a direct pitch to customers to participate in equity options for small businesses. We called this “micro-equity.”[3] One of the pitches we discussed was Ovenly, a small but popular Brooklyn bakery. Ovenly opened for micro-equity investment in 2023 with a goal $572,518. It closed its investment period with a total of ninety-eight micro-investors and raised $159,880, an average of $1,631.42 per investor. However, it shut the campaign down and sold the company refunding all the investors in the campaign. Some analysts predict this market to continue increasing in the ten-year term.[4]
We have also discussed microfinance as a potential alternative investment. [5] Microloans, by way of reminder, gained attention when humanitarians worked to find ways to foster structural change in developing countries through sites like Kiva.org. In the U.S., microlending has developed into a wide market, including consumer and business elements. According to Northern Trust, “private credit is now the second largest private capital asset class behind private equity, with $1.6 trillion of private debt assets under management compared to $8.5 trillion for private equity.”[6]
The analysts are also expressing confidence in other alternative investments. As to real estate, the continuing housing shortage may help balance the extra supply of office rentals. Analysts also note that natural resources have been an “an important hedge against higher inflation and geopolitical escalations.”[7]
Things seem less positive when it comes to cryptocurrency. While some firms, like Morningstar, suggest that cryptocurrency might be able to be normalized, many analysts suggest that cryptocurrency will remain a highly volatile investment due to changes in the U.S. administration and the continuing potential for fraud.[8]
There are a few other developments we think are worth noting. The first was a trend towards highlighting investments in infrastructure. This is partially due to advances in AI, which require additional energy, as well as the return to manufacturing in the U.S.[9] Another is that analysts think private equity, one of the traditional alternative investments that had been underperforming due to a slow down in mergers and acquisitions. Some think that interest rate decline could, over time, return private equity to its more standard returns.
Advisors often track the sources of information about alternative investments – whether it comes from social media, such as YouTube, or mainstream media, such as investment programs like The Morning Show. There could be a big shift around how clients get information on alternative investments. Two trends may make word of mouth overtake influencers making content about finances. First, social media platforms may be either transforming significantly or be rendered useless due to AI generated content. And efforts to overcome isolation may have finally gained stem. Experts say there is an increase in the number of clubs and social groups forming. Advisors may want to prepare for these two changes.
[1] https://www.bcgbenefits.com/blog/emotional-investing-and-alternative-investments
[2] https://www.bcgbenefits.com/blog/alternative-investment-trends
[3] https://www.bcgbenefits.com/blog/micro-equity
[5] https://www.bcgbenefits.com/blog/microloans
[8] https://www.morningstar.com/lp/cryptocurrency-landscape
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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