Alternatives Now Essential For Every Portfolio
The high net worth (HNW) and ultrahigh net worth (UHNW) individuals are wealthy because they invest differently than the average individual investor.
Whereas the average investor follows a traditional 60/40 allocation (60% stocks/40% bonds/fixed income) with little to no allocation to alternatives, the wealthy allocate significant portions of their portfolios to alternatives.
It’s no coincidence that there’s a correlation between allocations to alternatives and an individual’s level of wealth.
The chart below demonstrates that the more an individual allocates to alternatives, the wealthier they are. UHNW individuals ($30 million in investable assets) allocate close to half of their portfolios to alternatives.
J.P. Morgan is not the only source to point out high allocations to alternatives by UHNW individuals. The members of the online investment club Tiger 21 ($50 million in investable assets) are also highly allocated to alternatives, with a particular penchant for private investments like private equity and private real estate.
The value of alternatives is undeniable. The wealthy are drawn to alternatives for the income, growth, and diversification they offer.
In addition, the wealthy have also discovered that the more they leverage the expertise of others through a co-investment arrangement – where they invest directly in individual private companies as a limited partner (LP) alongside a general partner (GP) that leads due diligence and is ultimately responsible for executing the deal.
Co-investing allows investors to enjoy the benefits of passive investing while someone else (the GP) does the legwork. The more passive streams of income investors generate through co-investing, the better.
See the chart below:
According to the chart above, participation in co-investments has the potential to enhance returns, and the more an investor allocates to co-investments, the better.
No More Excuses.
Individual investors with traditional stock allocations shouldn’t be satisfied with average annual returns of 2.9% – not when they can be earning 14.9%+ like the ultra-wealthy who allocate to alternatives. It used to be that the average investor was shut out from the types of deals that only the wealthy were privy to; this is no longer the case.
The recent changes to SEC regulations surrounding private offerings brought on by the JOBS Act now make advertising permissible in certain circumstances and allow wider participation in other circumstances, such as crowdfunding.
The three principal barriers that once prevented average investors from investing in alternatives have all been eliminated:
Private investments are now more accessible than ever, thanks to recent regulatory changes. And the once seemingly insurmountable capital requirements for participation in exclusive private investments are now less daunting as sponsors and GPs have lowered their minimum capital commitments to attract investors in the face of increasing competition.
Finally, co-investment arrangements that allow investors to leverage the expertise of others allow investors who don’t have the time to participate in the lucrative world of alternative investments. Alternative investments – especially private investments – are now essential for every portfolio.
For investors seeking above-market returns from assets that offer diversification and growth through leveraging the expertise of others, there are no longer excuses for not allocating more alternatives to your portfolio.