Alternative Investments: Diversifying Your Client’s Portfolio
For years, alternative investments such as hedge funds, commodities, and private equity were out of reach for individual investors as they skyrocketed in popularity with high-powered money managers. That’s starting to change thanks to firms such as Blackstone, Fidelity, and AQR who have lowered the barriers to entry for the retail market.
According to PwC, global alternative sector assets will hit $18 trillion by 2020, compared with $10 trillion today. A estimates that alternatives will account for 40 percent of global investment industry assets and produce about 40 percent of industry revenues at the same time.
“The greatest growth is among the mass affluent (those with $100,000 to $1 million in liquid assets),” according to PwC. “The wealth held by the mass affluent will grow 50 percent faster than assets held by high-net-worth investors (those with more than $1 million). Greater access means that alternatives are becoming mainstream. The surge of investment in alternative assets has made them a central focus in asset management — a business that itself is stepping out of the shadows.”
Other options that may interest clients include commodities, which can diversify their portfolios since their prices tend to move independently of stocks and bonds. Emerging markets, which though risky can offer better returns than the U.S., are also worth considering. Given President Trump’s vow to ratchet up spending on infrastructure, retail investors also might want to look into municipal bonds that underwrite these projects.
Hedge funds, perhaps the best-known of the alternatives, have come under fire from investors for poor performance. Managers have responded to these criticisms by slashing fees. According to , hedge funds launched in 2016 have a mean 1.53 percent management fee and a 19.3 percent performance fee, down from the 1.66 percent management fee and 19.48 percent mean performance fee for funds that started in 2007.