3 Ways to Start Investing Like a Hedge Fund using $1,000 or Less
Easy ways to get started with alternative investments like Real Estate, P2P Lending, and Venture Capital
The ultra-rich rarely manage their own money; they employ a “family office” to handle their investments. And those family offices (along with lots of hedge funds and university endowments) have long put big chunks of their money into “alternative investments” — things like Real Estate, Private Equity, Commercial Debt, and Venture Capital.
Fortunately, access to alternatives for investors of rather-more-modest means has exploded in recent years, riding the wave of “fintech” startups and several key regulatory changes that came as part of the DREAM Act.
Here’s three ways to get started with alternative investments like Real Estate and Venture Capital with just $1,000 or less. (I have invested at least that much in each of these platforms — I won’t recommend something I don’t use myself! Note some of the links below are affiliate links.)
1. Peer-to-Peer Lending: Lending Robot
When I first started out with P2P lending about a year ago, I invested directly with Lending Club, the poster child for the sector. A lot has changed in the past 12 months, and since I wouldn’t personally put any new money into Lending Club today, I can’t recommend that you do either. The other major player here, Prosper, has had its own challenges, but I’m still bullish on the concept of mediated peer-to-peer lending, and at least for now, the returns to me are worth the risk of sensibly investing a modest amount.
With both Prosper and Lending Club, personal and business loans of up to $40,000 are split up into $25 pieces and sold off to investors. Both also offer rich data about each loan and borrower, tools to filter for your risk preferences, and data about historical performance. But since I’m lazy, I was thrilled to find Lending Robot, a service that automates and tracks investments across both platforms with nifty (and simple) tools for monitoring performance and adjusting your strategy.
With $1,000, you’re diversifying across 40 different loans, which goes a long way toward minimizing the risk of any particular loan defaulting (Lending Robot has a great blog, including this post analyzing the ideal number of loans for effective diversification — tl;dr is that you can get maximum diversification once you hit about $1,500).
Lending Robot takes a healthy cut for their service (0.45% of the investment you manage through them), but only above the first $5,000, so if you’re starting with $1,000, it’s free. (And if you join with this link, they’ll bump that to $10,000.)
2. Real Estate: Fundrise
Peer to peer lending gets a lot of the press, but there’s an incredibly vibrant fintech ecosystem around real estate. For HGTV junkies and would-be flippers, there’s plenty of ways to directly fund specific rehab projects without breaking a sweat (using sites like Fund That Flip and Patch of Land), but with minimums in the $1,000-$5,000+ range, you need a lot of capital to effectively diversify — or else one renovation gone wrong will kill your returns.
Enter Fundrise, which also started out offering direct investments in specific properties, but has since shifted strategy toward what they call “eREITs” (“REIT” is short for “Real Estate Investment Trust”). Right now they have two investment options: The “Income eREIT” is oriented toward generating income by investing in debt that funds residential and commercial real state projects; the “Growth eREIT” mixes debt and equity, so the returns will be more variable, but there’s more potential upside. With both choices your money is invested across multiple properties, reducing the risk if any single project is delayed or defaults. Dividend payments are made quarterly.
Most of the crowdfunding sites also only serve “accredited investors” (more on that below), but Fundrise is open to anyone with $1,000 to invest.
3. Venture Capital: Hedgeable
Another booming fintech sector is so-called “Robo Advisors” which use various algorithms and automation to allocated and rebalance investments as a low-cost alternative to high-fee managed mutual funds but for those (like me!) without the patience or inclination to construct and manage a portfolio of dozens of low-cost ETFs and index funds.
Hedgeable costs more than competitors like Betterment (which I also use for an IRA and would certainly recommend), but has one feature in particular that sets it apart and offers an outstanding value if you want to dip your toes into Venture Capital.
For now, the feature is only open to what the SEC calls “accredited investors”. (You can read the gory details here, but the most common way to qualify is if you earned $200K or more in each of the last two years, or $300K together with your spouse.) Although that’s certainly not small change, given salaries in expensive coastal cities like Boston, New York, or San Francisco, it puts a lot of interesting investment options within reach for quite a few professionals (see this useful post from Financial Samurai showing how quickly housing and child care can eat up a “normal” six-figure salary in San Francisco).
Once you confirm your accredited status with Hedgeable, you have access to their in-house Venture Fund, which itself invests in other funds through services like AngelList, Funders Club, and OurCrowd. So why bother going through Hedgeable? Well, the funds they invest in typically have minimums of at least $10,000 each. So with Hedgeable, for $1,000 (or less) you’re getting the kind of diversification that would otherwise cost you $30,000 or more. (Obviously that also means a corresponding smaller return given the smaller investment, but as a way to get your feet wet it’s hard to beat.)
This is a fantastic time to be an amateur investor, but of course YMMV (your mileage may vary). I’m a big fan of placing lots of small bets as a way to both diversify risk and to maximize learning, and before you put your hard-earned money into any of the above, keep the following in mind:
- Don’t risk what you can’t afford to lose, especially when you’re just starting out.
- If you have any consumer credit debt (credit card, auto loan) you should pay that off before putting any money into alternative investments.
- These are all relatively illiquid, which means that if you’re going to need that $1,000 anytime soon, put it in the bank instead.
- Risk and reward fall on a spectrum: you won’t hit a home run with P2P loans, but you’ll earn cash interest payments every month, which is fun. On the other hand, with a venture investment you’re unlikely to see any of your money for years, but there’s at least a small chance that one of those fund investments will be the next Facebook.
- Treat your first few investments in alternatives as educational expenses, and choose the options that you think will maximize what you learn. Humans are wired to learn by tinkering, and tinkering while minimizing risk is still the best way to grow your knowledge and confidence.
More from Andrew Savikas:
Education is what people do to you and learning is what you do to yourself.
— Joi Itomedium.com