Alternative Investments to Explore in 2021

The Modern Alternative Investments Landscape

A version of this article was originally published on November 27, 2017.

Greater exposure to alternative investments can boost portfolio returns and offer downside protection alongside a portfolio of traditional assets. Simply put, alternative investments are offered outside of public markets and are less liquid than traditional assets like stocks and bonds. While traditional assets provide passive shareholders with efficient exposure to “beta” or “the market,” alternative investments are associated with private markets and correlate less with publicly traded assets. Thus, they derive yield and appreciation potential from the skill of individual managers, operators and/or the quality of underlying assets.

Due to their lower correlation with public markets, diversifying into alternatives can also reduce a portfolio’s overall exposure to risk. A recent Blackstone study¹ supports this finding:

A Blackstone study shows that adding alternative investments would boost overall average portfolio returns

Today, there is now growing enthusiasm for passive alternatives available through online platforms. Let’s take a look at a few modern, online investments typically referred to as “alternative investments.”

Equity Crowdfunding and Pre-IPO Startup Investing

“Equity crowdfunding” – when individuals purchase shares in pre-IPO startups for relatively small amounts – is perhaps an even more radical change than real estate crowdfunding, allowing individuals to operate as small-scale venture capitalists. While real estate is tangible, though, equity crowdfunding often presents a more opaque investment thesis.

Individuals who invest in startups assume similar risks to venture capitalists, but without the analysis firepower, capital reserves, or negotiating leverage that VC firms wield. What’s more, few of the platforms in the space offer in-house diligence and underwriting for the benefit of individual investors, creating additional risk.

The bottom line: equity investing in pre-IPO startups can yield outsized returns, but it is not for the risk-averse. To a greater extent than real estate investing, each potential investment in a pre-IPO startup requires in-depth knowledge of the company’s leadership and business goals. While broader availability of this asset class is a welcome development, even industry leaders warn against less experienced, less high-net-worth individuals allocating substantially to equity startup investing.

Art & Other Collectibles

In a recent survey, 86% of wealth managers said they believe art and other collectibles should be included as part of a wealth management offering. In addition, 52% of art collectors said that portfolio diversification is an important motivation for them when buying art, and 28% said they purchase art as a hedge against inflation. This is great news for passive investors, who now have access to fine art via crowdfunding platforms. 

Farmland Investing

If you live in a city, you might overlook the potential value of farmland. However, like private real estate, farmland can diversify your portfolio, and provide attractive yields. Like quality real estate assets, farmland is essential, scarce, and can provide investment value as a function of skilled management (and hence a source of alpha). It is also relatively stable compared to other asset classes, even in periods of economic volatility. In fact, the average value of farmland grew from $2,532 per acre in 2010, to $3,160 in 2020. 

Both CRE and farmland should appeal to investors today, as we move toward a period of post-pandemic economic recovery. That said, one size does not fit all. Consider which assets may naturally complement your current portfolio strategy:

Row Crops

Most row crops are annual food and fiber plants that can be harvested every year. Row crops generally produce stable returns with more short-term flexibility, as farmers are able to rotate crops as needed. Major crops in this category include: 

• Cereal grains (i.e. wheat, corn, and rice)
• Legumes
• Roots, bulbs, and tubers (i.e. potatoes, beets, onions, garlic, and radishes)
• “Specialty” Fruits and vegetables (i.e. leafy greens, brussels sprouts, pineapples, squash, and tomatoes)

Permanent Crops

As the name suggests, permanent crops are perennials, which often span decades between replantings. Given the nature of these crops, they are typically long-term investments, which may take some time to pay off. Major crops in this category include: 

• Vineyards
• Berries and other shrub crops
• Trees crops (i.e. stone fruits, citrus fruits, tree nuts, apples and pears)

The bottom line: Since farmland tends to be stable, more speculative types of real estate investments (i.e. value-add equity or development; projects in emerging Tier II markets; niche asset types like cannabis facilities) would be a good supplement for any investor looking to balance solid yields with upside potential.

Passive, Private Real Estate Investing

Private real estate investing is an established alternative asset, and the alternative asset class that is generally best understood by self-directed investors. Online passive real estate investing (often referred to as “real estate crowdfunding”) presents an alternative to traditional modes of real estate investing, with lower barriers to entry.

Our belief that online passive real estate investing provides downside protection, and better portfolio diversification, is well-supported² by historical performance data. Relative to equity crowdfunding and other alternative assets, private real estate investing provides more historical precedent for consistent yield, the backing of a tangible asset with inherent worth, and low correlations with public markets.

Historical allocation to alternatives by different classes of investor. This shows the immense room for growth among individual investors with respect to alternative investment holdings.

Conclusion

The asset classes discussed above may be worth at least some small exposure for investors who are not overly risk-averse, and seek greater portfolio diversification. In particular, self-directed accredited investors should now give greater consideration to private commercial real estate and farmland, due to these asset classes’  historical precedent for low volatility, stable cash flows, and relatively strong performance during downturns.

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¹https://www.blackstone.com/wp-content/uploads/sites/2/2020/06/seeking-an-alternative_standard.pdf
²https://www.investopedia.com/articles/mortgages-real-estate/09/real-estate-portfolio.asp