Creating Investment Opportunities In The Alternative Markets

A career spent learning to push my own limits physically, mentally and spiritually has been instrumental in developing more meaningful personal ideals and an understanding of my role in helping navigate the biggest challenges facing the world. My experiences as a Gordini athlete atop the highest mountains in the world have convinced me that the safe, easy way is not only limiting but in all honesty pretty boring as well.

In the previous two articles in this series on alternative investments, I shared how the traditional investment model is dying and sought to explain the immense extent to which the stock market is overcrowded, thus diminishing the realization of true investment potential. In this final piece on alternative investments, I would like to share why it pays to move away from the traditional investment “dot,” and explore the “white space” outside of that dot in order to help discover a novel “terrain” on which investing can be made more productive and meaningful.

When meeting with a financial advisor, you are likely to discuss diversification. Generally, your financial expert will guide you toward stocks as a common, historical form of diversifying your financial portfolio. While they aren’t necessarily wrong, the problem lies in the fact that these public markets have become all too saturated. Opening access to the private markets, however, can alleviate the issue of this saturated playing field, allowing individuals to add real diversity to their portfolios through the addition of positions in startups and other alternative investments that provide bigger rewards for sound thinking.

From 2009 to 2017, private offerings sold through brokers increased threefold, producing a record of $710 billion in offerings in the latter year alone. Of course, many of these offerings are currently only available to accredited investors, but times are changing. The SEC is currently looking at ways to increase the number of individual investors interested in private offerings, which will help reshape the financial landscape profoundly.

According to research performed by alternative investment data tracker Preqin, the current “white space” of alternative investing is projected to grow to $14 trillion globally by 2023. This growth is being driven by investors’ eternal desire for strong yields, the subsequent demand for and increased availability of alternative assets, and the declining number of companies listed in the public markets.

The important thing to remember here is that we don’t want to create another overly saturated market. When discussing the alternative, we should be clear that investments such as hedge funds and private equity funds can too quickly become the mainstay, defeating the purpose of the transformation itself in the process.

A great example of this is private equity. Investors are allocating more capital to private equity today than at any other time in history and, as a result, average purchase price multiples are at historic highs; In 2017, 75% of private equity transactions involved multiples that exceeded 10x EBITDA. The transaction multiples in 2019 are even higher.

So how do we challenge ourselves and our financial advisors to build a portfolio that will perform at the highest level? We need to move outside the dot, into the white space in search of specialized, niche opportunities.

Two very interesting areas of focus for thinking about niche investment opportunities are alternative credit and currency trading.

ALTERNATIVE CREDIT

Historically, when small businesses and startups search for capital, they go to the bank. While banks have been the logical, or maybe the only choice, for a number of years, individuals with the right amount of capital can now take part in the private funding of these interesting businesses in the form of short-term loans.

A great benefit for investing in the expanded provision of alternative credit is that it places investors more directly in charge of their assets. For example, Denali Venture Philanthropy is an investment organization that my wife Meredith and I have built to help connect certain small businesses and startups with funds from well-established portfolios to launch their dreams and carry out socially transformative work. Private investors are connected with entrepreneurs who are committed to affecting social change, and often are able to push forward a host of worthwhile initiatives that often die in the quagmire of political bureaucracy or carry higher risk-reward functions than are palatable to traditionally-minded institutional and individual investors.

Two intriguing forms of alternative credit include supply chain finance and asset-backed lending. Stringent underwriting and strong collateral mean that investments are anticipated to provide steady returns along with protection against economic downturns felt primarily and initially in public markets.

CURRENCY TRADING

Currency trading is another alternative investment option that can provide consistent returns to your financial portfolio. Specifically, foreign exchange trading, known as forex, is built around certain macroeconomic tracking algorithms which signal short-term price anomalies. This tracking system signals a buy or sell cue that aims to capitalize on such fluctuations.

These types of investments are called managed futures, and because managed futures have a low long-term correlation to traditional asset classes such as stocks and bonds, they add a great level of diversification.

As we begin to identify different alternatives to investing and diversification, it is important to note that with technology rapidly changing everything we do, we must continue striving to stay one step ahead.

Starting now, by learning about various niche investment opportunities, is one of the best first steps you can take in finding where your passion meets your financial objectives. It’s time we all explore an alternative way to improve our financial futures and investing outside the dot is a great first step we can take as we embark on a long journey in the midst of a rapidly-changing world.