Is Alternative Investing Only for the Wealthy?

Once only available to institutions and wealthy individuals, alternative investments – basically securities that do not trade on any exchange – are winning a broader appeal, according to a panel of advisors.

The goal of using alternative investments is to diversify a portfolio or to lessen its risk. These vehicles tend to be illiquid, meaning they are difficult to trade. They can only be sold to others via financial institutions.

Panelist Peter Budko, chief investment officer of RCS Capital, a full-service investment firm, said the spectrum of alternative investments is wide. They include include real estate, oil and gas partnerships, and middle market loans (that is, those to companies that need capital but are too small to borrow in the public markets). These instruments tend to be attractive to the so-called mass affluent, people with investible assets between $250,000 and $1 million, not including real estate.

The panel, on “The Case for Alternative Investments in a Volatile Markets,” was held recently as part of National Financial Advisor Week in New York’s Times Square on an outdoor stage. This week-long event, which attracted hundreds of onlookers, featured financial advisors giving tips on personal finance, ranging from retirement saving to college funding. The panels also focused on how people can get the most out of advisors. At the event, Jennifer Rufener of Dover, Ohio, won a sweepstakes for a free college education.

Not all alternative investments are illiquid. Alternative mutual funds – which package alternative securities in regular funds that allow you to get in and out daily – are also a growing market. According to Christopher Mee, national sales director of liquid alternative investments, at Realty Capital Securities, “They give clients and FAs [financial advisors] ways to diversify their portfolios they would not have in the past.” A sophisticated advisor might allocate as much as 20% to such funds to reduce the risk of a investing in a more volatile market sector.

Specifically, if an advisor has clients with a big position in, say, large-capitalization stocks (equities of huge companies), they might use long-short funds to dampen risk. These mutual funds combine positions that managers expect to gain with those it believes will decline. With short selling, they bet that a stock will fall.

Non-traded REITs are popular, Budko noted, particularly in hotels. Unlike regular real estate investment trusts, which typically are baskets of properties like office buildings and are publicly traded like stocks, these too tend to be illiquid. Usually, in bond-like fashion, you can get your money back in a set number of years. Like traded REITs, they pay nice dividends, channeling the bulk of their real estate rent income to investors.

Curtis Launer, senior vice president at American Energy Partners, described how oil and natural gas partnerships allow the mass affluent to earn income and profit on any capital gains. What’s especially encouraging is that domestic energy is a growing business.

“The U.S. today is the number one natural gas producing country in the world,” said Launer, whose firm invests in energy exploration and production. “And by some projections, including ours, the U.S. will be the number one oil producing country in the world by 2020.

That may be, but investors should realize that alternative strategies are not for every one. If you need the money back quickly, that’s a problem. Some alternative securities lock up one’s investment for a year or more.

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