(EisnerAmper) - What is your outlook for alternative investments?
Private equity and venture capital will continue to attract significant capital and potentially find their way into more individual portfolios. There are a number of new funds being created which seek to capture capital for these types of investments.
Hedge funds on the other hand are likely to see continued outflows due to investors believing other investments can provide better returns. For example, Renaissance Capital’s public funds lost approximately 20% in 2020, while their private funds made over 70%. This drove away many investors. Today, it’s simply too easy to find better investment opportunities so investors are switching to investments which provide better returns. Their expectations for annual returns are also at all-time highs and as such, investors are less willing to wait for their investments to deliver the results they demand.
Managed futures continue to lack traction due to investor failure to understand this type of investment. Drawdowns are typically too large for most investors and perceived risks are too high.
Robo advisory services from firms such as those which automatically trade derivatives and stocks via sophisticated technology directly in client accounts have significant potential for all investors. This type of robo advisor is very different from traditional robo advisories which simply rebalance client portfolios. Automated trading has the potential to provide higher returns with less risk than other investments. Derivative volume has increased exponentially in recent years due to investors taking advantage of market trends, using the leverage available from the options markets…a little money has the potential to go a long way.
Arts and antiques are both subjective investments. While the Boomer generation continues to invest in these types of assets, Millennials have different interests, and while they will, on average, inherit over $200K from their parents, their interests may not align with their parents. As such, these types of investments could see lower or potentially even negative returns in the future.
Commodities and real estate are again subjective and should be dealt with on a case-by-case basis. There are some are great investment opportunities in this space; however, the work required to identify these opportunities requires investors to do too much, which makes these investments nothing more than a small part of a typical portfolio.
What are the greatest opportunities you see and why?
U.S.-listed stocks and options will continue to see growth and appreciation over the next three years as the U.S. economy returns to pre-pandemic levels. Demand is such that U.S. stocks are realizing massive capital inflows from abroad. Large market cap stocks will continue to grow earnings and benefit from their dominance in the market.
The greatest alternative investments, however, will come from various venture capital and private equity funds. Given these types of investments have historically been limited to the wealthiest 1% and given 50 people in the U.S. now have more wealth than the poorest 165 million combined, its clear alternative investments have provided real wealth to the 1% and as such will continue to realize significant upside.
Given instant access to information via social media and the internet and given $75 trillion dollars will change hands from Baby Boomers to younger generations, Millennials and Gen Z will find themselves with money to invest. And given they are information-savvy, they will seek out the best opportunities in the markets. There are tremendous opportunities for firms to put this capital to work in the alternative investments outlined above.
What are the greatest challenges you face and why?
Investors tend to misinterpret the information provided by the financial industry. Many small investors rely on message boards such as Reddit, or “gurus” who have no legal accountability to their clients. These investors take risks which are more akin to gambling than investing. The “instant information” generation does not typically make the time commitment to find safe and successful investments. In fact, investors today are convinced the returns generated from the pandemic lows can be replicated long-term. This is simply unrealistic and therefore, as a financial advisor, the greatest challenge is to not only provide clients with alternative investments with significant upside, but to also educate clients to accept returns which are realistic long-term. Unfortunately competing against the “experts” who are not required to comply with SEC regulations makes our job much more difficult.
What keeps you up at night?
- Is the Delta variant or another mutation of the coronavirus likely to create additional stresses to the global economy?
- The current market is experiencing an irrational exuberance and investors may be unwilling to accept even a small, 10% correction. Corrections are healthy for the markets, but our fear is investors have unrealistic expectations and as such may end up buying high and selling low.
- Inflation requires a watchful eye. Although the Federal Reserve claims it will not take any action on rates before inflation sustains higher levels, the “real economy” is experiencing lasting and permanent inflation in wages, food, and housing. Once the Federal Reserve acknowledges this fact, the markets will “adjust” to a new norm which has the potential to impact many smaller and less sophisticated investors.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.
By Elana Margulies-Snyderman
AUGUST 19, 2021
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Christopher Anthony, Co-Founder & Chief Investment Officer, IndigoFI.
