Council Post: Top Trends Impacting The Alternative Investment Market (2024)

Thomas H. Ruggie, Founder & CEO, Destiny Family Office.

According to PwC, global assets under management (AuM) are expected to top $145.4 trillion in 2025, nearly double the $84.9 trillion in 2016. The same research predicts that alternative investments will reach $21.1 trillion by 2025, representing 15% of all AuM.

During periods of economic uncertainty, alternative investing options are an attractive way for individuals to diversify their portfolios. Thanks to changes in the industry and technology, there's never been a better time to get into the world of alternative investing. To gain the most benefit, however, there are several trends investors should keep in mind.

Democratization Of Alternative Investment Opportunitiesew things have impacted the alternative investment market as much as its democratization and the increased access to opportunities that people now have. One example is crowdfunding. For many investors dipping their feet into the world of alternative investing, crowdfunding is one of the easiest ways to try it. Crowdfunding has successfully kicked off everything from one-off projects to entire companies, providing lucrative opportunities for investors.

More established investors are enjoying easier access to private lending opportunities. Following the financial crisis of 2008, many organizations struggle to acquire financing from traditional sources. This makes private lending an attractive opportunity, for both organizations and investors.

Another way the market has been democratized is via increased awareness. For example, I was surprised by the number of younger people buying sports memorabilia at the National Sports Collectors Convention. Often these individuals aren't buying items because they're related to their favorite players, but because they recognize the investment opportunity.

Investors Will Continue To Look For Unique OpportunitiesWhen the housing market crashed in 2008, many investors saw an opportunity to buy houses for pennies on the dollar because they had the cash on hand. Fast forward a few years and one of the reasons the housing market has boomed in Florida is because those investors were able to invest when the opportunity arose.

This trend will continue to repeat itself any time there is an economic downturn or recession. Those who have cash will use it to further diversify and take advantage of investment opportunities.

Investors Will Back Companies That AdaptAs the technological landscape continues to change, companies will be divided into those that effectively adapt and those that do not. For example, Amazon quickly adapted to the rise of e-commerce and now dominates the field. In contrast, Walmart has been trying for years to catch up with Amazon but still has a long way to go. Similarly, Tesla jumped to an early lead in the EV market, while companies like GM and Ford continue to struggle with the transition.

This dichotomy between companies that can adapt versus those that cannot will continue to create opportunities for savvy investors, especially those looking for alternative investments. Hedge funds, private equity and direct investments present opportunities for investors to back companies that demonstrate an ability to adapt to new technologies.

Investors Must AdaptInvestors often approach the alternative investment market not realizing how much it differs from traditional investments. There are a number of benefits to the alternative market, the possibility for a better return being chief among them. There are also benefits related to portfolio diversification and less correlation to the public market, giving investors a cushion against the ups and downs of traditional investments.

Despite the advantages, alternative investments do have unique challenges, especially when it comes to reporting, liquidity and taxes.

• Reporting: Unlike traditional investments, performance reporting in the alternative market often lags behind and lacks the transparency investors are accustomed to with publicly traded companies. Information investors are used to seeing in publicly traded companies is not readily available with private equity and direct investments. As a result, investors have to put in more work to research the companies they are invested in and keep up with developments.

In addition to the lack of transparency, it's not uncommon for reporting in the private equity and direct investment market to lag behind by at least a couple of months. I have had clients come to me confused about why their statement doesn't reflect the previous month's activity when they know the company they've invested in had a stellar month. Nine times out of 10, it's because that information will not be on any statement for at least a couple more months.

• Liquidity: Another difference investors must adapt to is the lack of liquidity. Unlike a traditional investment that can be quickly cashed out when the stock jumps, many alternative investment opportunities tie up funds for longer periods of time.

For example, in the case of private equity or direct investments, liquidity can be tied up until there is a major liquidity event, such as the company going public or being bought out. Similarly, when investing in collectibles, it can take years for an item to appreciate in value. As a result, we often tell our clients not to expect significant returns for at least five to ten years.

• Taxes: Taxes are another area that can pose challenges for fledgling alternative investors. Many investors are accustomed to having their taxes filed on time or well in advance of the deadline.

Alternative investments, however, are almost always categorized as K-1 investments. As a result, there is virtually no chance for the necessary paperwork to be completed by the April 15 deadline. Instead, alternative investors must file extensions and be prepared for the possibility of not filing their taxes until very late in the extension window.

Alternative Investments Require Additional PlanningAlternative investments require additional planning compared to traditional options. For example, when for end-of-life and inheritance decisions, stocks, bonds and traditional investments are relatively straightforward.

In contrast, alternative investments—especially collectibles—require extra planning. For example, extra effort is involved in making sure an investor's prized baseball card collection is properly valued and that their heirs understand its value, as well as what to do with it when the time comes.

The alternative investments represent unique opportunities for the savvy investor. Understanding the above trends can go a long way toward successfully navigating the challenges and rewards of the market.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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