Alternative Investments, Now for Everyone

Stop Investing like it’s 2005.

It’s 2018 and you can take part in alternative investments from the very device you’re reading this on. You don’t have to be a millionaire to invest like a private equity hotshot anymore.

Alternative Blackstool

Ah, Blackstone, the crème de la crème of Wall Street and the model example of an alternative asset manager. It is the largest one in the world, invests in all sorts of funky asset classes, and most notably, was portrayed as “Blackstool” in the Netflix show Friends From College — anyone else shamelessly binge that show?

What is an alternative asset manager and why do we care about it?

An alternative asset manager handles rich people's money and puts it into all sorts of obscure asset classes like private equity, venture capital, real estate, and private credit. Basically, they specialize in investments outside of stocks and bonds. Unfortunately, over 99% of us will never be getting a call from Blackstone, considering they have private funds with minimum investment requirements in the millions of dollars.

Alternative investments have become an essential slice of rich investor portfolios over the past two decades. This is because alternatives perform independently to the stock market, which is helpful when the Dow Jones drops 1,000 points in a day. It also has been proven to boost investment performance. Long-run studies show an alternative-heavy portfolio yielded 2x the returns of a basic portfolio for large endowment funds.¹ The logic is that a wider universe of investment opportunities provides hidden value others are missing while avoiding the “don’t put your eggs all in one basket” fallacy. Stocks, bonds, real estate, loans, commodities, private equity, and venture capital are all influenced by different factors in different ways. The more diverse your holdings, the stronger your portfolio. This isn’t our opinion, it’s what the U.S. government says.

For a while, it was a huge buzzkill that professional alternative asset managers only catered to the rich. Just what we needed for already crippling inequality: more ways to make only the rich richer.

But you know there’s a “but” coming.

The past decade has changed this. Technology has enabled direct access to alternative investments for average Jane investors. From our counting, you can now invest in real estate, private loans, and venture capital as a regular individual — no Blackstools needed.

What do rich people’s portfolios look like?

According to a Capgemini and RBC Wealth Management survey in 2015, high net worth investors split their money between the following:

· Equities — 33.9%

· Cash and cash equivalents — 23.7%

· Fixed income — 18.0%

· Real estate — 12.3%

· Alternatives — 12.2%

Alternatives such as private equity, hedge funds, and venture capital make up nearly a quarter of rich individuals’ investments.

For institutions, the “Yale Model” is something of a gold standard:

· Private equity — 31%

· Absolute return — 20%

· Real estate — 17%

· Foreign equity — 13%

· Natural resource — 8%

· Domestic equity — 6%

· Bonds and cash — 5%

Institutions who follow the Yale model are closer to 50% of their portfolios in alternatives. This strategy yielded Yale’s endowment 14% per year on average over a two decade period. The highest performing endowments even had up to 60% of their portfolios in them.¹

Simply put, rich investors put a significant portion of their money in alternatives.

What is available to everyone else?

Typically, the average investor has zero invested in alternatives, excluding the equity on your house.

The average investor has always received “rule of thumb” financial advice. The prototypical stock broker follows some variation of “subtract your age from 100 and that is your equity to fixed income split.” Then they charge you 1.5% and tend to sell you stuff you don’t need.

The reality is, we are in a brave new world of investing. You can now automate your bread and butter stock and bond investing with robo-advisors like Betterment, Wealthfront, and SoFi for a fraction of the cost. Set it and forget it.

Even better, there are ample options in the alternatives space. You can invest in startups (Slice Capital), lend businesses money (Funding Circle), lend individuals money (Prosper), and own real estate without the burden of property management (Fundrise). All of these options give you diversification, and diversification strengthens portfolios.

We aren’t telling you how to invest your money. All we hope to do is open your mind to new options that are leveling the playing field between rich investors and the rest. Access is key, and for the first time in the history of finance, the average Jane can invest more like Jane Eyre. This is game changing for both our investment strategies as individuals and our societal inequality. As always, make sure the investment is right for you and do your independent research.

One Last Note

Alternative investments aren’t for everyone. They are risky and require a higher level of sophistication than stock and bond investing. That being said, there are a lot of good platforms out there trying to tackle that challenge. With anything financial, you should be skeptical of talking heads telling you what to invest in — like Cramer on Bear Stearns.

Three days after that infamous recommendation, Bear Stearns collapsed. Do your own research and only invest what you can afford.

[1] “Capital in the 21st Century”, Thomas Piketty, pg. 449

Disclaimer: This article does not intend to provide investment advice. The companies mentioned are not currently or planning to raise funds via Slice Capital’s funding portal. Slice Capital does not view the companies mentioned as direct competitors to any of the issuers currently raising on Slice’s funding portal.