When a bull market weans and traditional markets are volatile, having an allocation to alternative funds and direct investment access to alternative investments (anything other than stocks and bonds) helps to cushion a portfolio and offer diversification strategies for reducing risk and attaining attractive returns in capital and fixed income.

To help facilitate that process, J.P. Dahdah, CEO of Vantage Alternative Custody Services, created the ALTS Forum, a collaborative concept and acronym meaning “Always Looking to Solve” and a play on the word “alternatives.”

ALTS Forum was created to help with investor education and forge communication for the alternative investment community. ALTS Forum is comprised of financial services executives that represent a 360-degree view of the ALTS investing ecosystem. Primarily, they build strategies for investor education on portfolio diversification to non-correlated assets and markets — the changing investment landscape (offerings and access) and how to advance vetted investment opportunities.

We talked with members of the ALTS Forum to get them to explain the benefits of alternative investments and what it could mean to your financial future. Members of the ALTS Forum include:

• J.P. Dahdah, CEO, Vantage Alternative Custody Services (JPD)

• Peter Anadranistakis, president and co-founder, Oxygen Hospitality Group (PA)

• Corey Bird, principal and wealth manager, Rowland Carmichael (CB)

• Mark Vange, CEO, TokenIQ (MV)

Jared B. Black, managing partner, Black Law Group (JB)

Question: What are the biggest obstacles the alternative investment industry faces and what role are you playing to help educate and help others overcome these obstacles?

J.P. Dahdah: The biggest obstacle facing the alternative investment industry is the lack of awareness that alternative assets beyond the stock market can be purchased with tax-favored retirement plans.  Collectively, there are over $25 trillion dollars held within U.S. retirement accounts, but less than 2% of those dollars are invested in alternatives.  Retirement accounts represent American’s largest source of investable assets, and unfortunately, we’ve all been incorrectly led to believe that our investment options are limited to Wall Street-based publically traded securities.

Peter Anadranistakis: Investors don’t always know where to get started with their alternative investment strategy. It’s important to educate and make the investment process as seamless as possible. Working with an ecosystem of financial experts is one way to gain awareness and ease the process.  By process, I mean from an RIA or investor vetting the upside potentials and risks of a sponsor’s opportunity, to recommending potential investments that meet the criteria for the investor’s portfolio to the custodial company selected to invest with retirement funds through legal and compliance. What I’ve witnessed throughout my years in the industry is once an investor takes that first step, he or she realizes there is a myriad of alternative opportunities available outside Wall Street.

Corey Bird: Access to top-tier opportunities is the most difficult part of dealing with the alternatives environment. Top tier managers don’t need to look hard for capital, so firms are constantly viewing the investment environment and current offerings. Due diligence on the investment and working with a sponsor where there is a high level of trust, transparency and track record is very important. Once the strategies are implemented, the next challenge is monitoring and reporting. Sponsors need to view reporting as its fiduciary responsibility and work with advisors to ensure reporting integration so they can take that burden off the clients. 

Mark Vange: Due to both history and regulation, many of the best alternative investment opportunities tend to favor the wealthy and the connected.  Consider, for example, the municipal city bond market, a $3.7 trillion-dollar market on which governments spend $4B annually in issuance costs.  According to the Brookings Institute, the rate of household participation in municipal bonds has dropped from 3.5 percent of households in 1989 to less than one percent in 2013, while the greatest increase in municipal bond holdings has come from banks, with an increase in holdings from $191 billion in 2006 to $537 billion in 2016 according to the Federal Reserve Board.

Many alternative investments are striving to push the envelope not only in their specific field but also in terms of the delivery of their presence and services, including funding activity. Token IQ, Inc., for example, is focused on empowering the middle ground between traditional investments, including alternatives, and the new and emerging field of Initial Coin Offerings (ICOs) and crypto-currency focused fundraising more generally.  By providing key capabilities such as KYC (Know Your Customer), token recovery and market-making, we bridge the promise of fully digital asset distribution, with the realities of current and future regulation. Distributed Ledger-based investing, with its inherent time and cost savings, allows alternative investments to break through to broader markets, and investors to participate in such investments more safely and transparently.

We educate and empower investors through local workshops, written content and video blogs helping them connect the dots that a Self-Directed IRA can be utilized to fund their preferred alternative investment strategies.

Jared B. Black: The biggest obstacle inside of the investment management sphere for alternative investments generally is educating the consumer (e.g., the investor). In my legal practice, I try and steer investment managers and sponsors to “plain English” explanations of the investment thesis and the grasp of their own space in their marketing materials and in their communications with equity partners and participants.  In my investment management practice, which focuses on workforce multifamily housing communities, I make an effort to speak to each current and prospective investor at the onset of any investment opportunity so that I can become convinced myself that they understand what they are investing in, and why the investment they are considering should make a real positive return and further, that they have the financial sophistication and wherewithal such that a privately placed investment is appropriate for their personal portfolio.  

Question: What do you see as the main reasons preventing alternatives from becoming more mainstream?

JPD: Investing in alternatives is still perceived as a complicated process, which prevents many investors from taking the first step.  In order for alternatives to be more mainstream, it’s critical to make it easy to vet options and invest in them.  We’ve seen an increasing uptick in Fintech start-ups seeking to solve this dilemma and disrupt the traditional model by creating alternative investment marketplace platforms.  Marketplace portals promise to offer a proficient and transparent user experience in which investors of all ages and net worth can identify alternative opportunities that satisfy their investment appetite and financial goals.  As a custodian, we work diligently to establish effective strategic relationships with various best-in-class platforms to integrate with their technology so investors can purchase alternative products on these digital marketplaces with their retirement savings easily.

CB: Mainstreaming alternative investments is restricted by suitability requirements. Many accredited investors have heard of these opportunities but didn’t know how to gain access. As an advisor, our job is to review client goals and diversify to achieve their legacy now and for future generations. In recent years, institutional sponsors have developed investment vehicles to make solutions available to more affluent clients.

MV: When it comes to many alternatives, investors are often uncertain about where to begin.  One core challenge is identifying good sources of information about opportunities; another is sorting through the multitude of opinions to get to the facts about the legality and tax implications of different investment choices.  Clearly, it’s important to focus on creating transparency and expanding the addressable investor base. Other key components of long-term success for alternatives are an improvement in the flow of information and more clear guidance from legislators and regulators on the treatment of various alternative classes.

Many investors, and especially institutional ones are rightly concerned about the implications of investing in segments where they do not have full visibility or that do not clearly align with their own internal, investor or regulatory guidelines and representations.  For our part, we’ve been working with issuers and some regulators to create binary funding vehicles that allow for the benefits of distributed ledger based fundraising while concurrently supporting more traditional forms of fund-raising.

JB: I do not actually view the “alternative” investment space as alternative – in much the same way that “alternative music” is for many people of my generation actually mainstream music (would anyone ever call Nirvana or Wilco alternative bands at this juncture?).   One reason alternative investing is not “more mainstream” is that generally investment sponsors are limited to offering their opportunity to “accredited investors” (e.g., generally speaking, a person with positive net worth of $1MM) as that term has been defined in Rule 501(a) of Regulation D by the United States Securities and Exchange Commission.  

PA: Awareness is first. Individual accredited investors are still learning about these types of investments.  It used to be only venture capital firms, private capital firms and ultra-high net worth individuals could gain access. Secondly, vetting the investment to help narrow down the options for the RIA and clients. Investors should work with professionals they trust, who help to streamline decision-making and assist in the due diligence process. Another advancement for helping alternatives to become mainstream is seamless integration with technology to help RIAs and investors understand the investment as well as the investment process. Every effort to reduce complications and create a simpler sign-on process for the investor is important.

Question: What are savvy accredited investors seeing as today’s hottest alternatives — cryptocurrency, blockchain, real estate, cannabis, etc. — and how and why are they looking at those investments? 

PA: Investors, in my opinion, want to invest in something that they understand, can assist them financially and aligns with their core values. I’ve witnessed many investors embrace being able to directly invest in something such as a hotel property where they can go into the lobby, sit in the restaurant, or talk to the general manager. They take pride that they have ownership in something they know and understand.

Investors often alternatively invest because they have heard about it from colleagues, friends, family etc. and read articles that have piqued their curiosity for higher returns, are backed by real estate, for example, and fit their investment portfolio goals. 

The industry continues to shift. One example of movement from traditional to nontraditional investments is by the Yale Endowment Fund, a $27 Billion Fund. In 1987, nearly 80% of the Endowment was in U.S. stocks and bonds. Today, the Endowment represent 88.5% of its portfolio allocated to diversifying assets of foreign equity, absolute return, real estate, natural resources, leveraged buyouts, and venture capital.

CB: From our view, clients underestimate some of the potential challenges in these emerging areas.  Regulation being one of the greatest concerns will eventually catch up to the operators in the various spaces. There is also a large potential for fraud, the investor will need to conduct due diligence and really understand the companies and people they are investing with, and to keep in place all the normal safeguards to eliminate intended or unintended mismanagement. Investors today seem to be focused on cash flow that is either spendable or able to be reinvested in new opportunities as market cycles change.  As the market continues its historic run, some investors are looking to reduce correlation to the stock market and use alternative to implement estate planning. 

MV: Savvy investors are looking at alternatives for a variety of structural reasons that run the gamut from having a rare opportunity to be at the early stages of several emerging and rapidly expanding industries to regaining the access that retail investors once enjoyed to high-growth deals — access that has largely been usurped and gated by the professional investor class that has expanded significantly over the last 20-30 years.

Like automobiles, plastics, electronics, mobile phones and the Internet have done, several emerging industries are poised to transform the way we work and live.  Cannabis, artificial intelligence, distributed ledgers and blockchain as well as more recently emerging fields like augmented reality, electroceuticals and commercial space exploration all represent possible future trillion-dollar opportunities in which savvy future-focused investors want to gain a foothold before they become mainstream and are occupied by incumbent interests.

JPD: Some alternative asset opportunities are limited to accredited investors only.  Historically, the largest alternative investment allocations have been directed into real estate-based offerings. However, cryptocurrencies, peer-to-peer lending, Fintech ventures, cannabis and blockchain-based private funds have emerged as the hottest alternative asset categories.  In anticipation of a stock market correction, many investors are choosing non-traditional alternatives as a way of increasing their diversification into assets that are non-correlated to the stock market and can provide more stability to their overall portfolio strategy.  One of the common objections to investing in alternatives is their tendency to be illiquid positions with holding periods of three to five years.  Savvy investors are learning that Self-Directed IRAs serve as the perfect vehicle to buy illiquid investments.

Placing illiquid assets into a long-term IRA account is a win-win solution with the added bonus of the tax advantages offered by retirement plans.  All publicly traded securities start as private companies.  Amazon, Facebook and Tesla are examples of popular traditional stocks that were originally private companies in which a select number of lucky early investors got in and made a fortune.  Therefore, having access to these opportunities at the ground level early on, accredited investors can experience impressive investment returns throughout the private market growth cycle.

JB: In my view, most sophisticated and “alternative investment” oriented investors are doing what they have learned to do and always do best – seek out superior risk-adjusted returns in spaces that they understand, know and can appreciate – and do it continuously and with consistency. Many Americans are homeowners and so already own real estate – many more own commercial real estate or interests in real estate, and those investors have been benefited by the positive economy of the past decade in very identifiable and easy to understand ways. So, in many respects, real estate investing is a “first base” alternative investment space for many investors.  As our historically low-interest-rate environment continues to hum along, I suspect that alternative investing utilizing leverage (such as commercial real estate, multifamily and similar spaces) will continue to be bright spots in the investing marketplace.  One thing I have learned from hard experience is this – try and hit singles. Just singles. But try and hit a few every month, every week, or every day.