When investors think of “alternative assets,” they often envision venture capitalists who invested early in what eventually became the next highflyer—those who managed to capture lightning in a bottle. These are people who staked everything on a slim chance that their investment would skyrocket tenfold or even a hundredfold. While such investments do indeed exist, they are far from the average experience.
The alternative asset class encompasses a wide array of asset types, ranging from commonplace real estate and commodities to the riskier realms of private growth companies and venture capital opportunities. Alternative investments were once exclusive opportunities reserved for either accredited investors or qualified purchasers who could take on the associated risks, higher fees, and intricate nature. Accredited investors must have $1 million in investible assets or $200,000 in annual income, while qualified purchasers must have $5 million in investible assets; both criteria exclude the investor’s primary residence.
However, as technology and access to information have made our world more interconnected, the investment landscape has transformed. It is increasingly likely that future portfolios will extend beyond mere stocks and bonds. Beyond the scope of being an accredited investor or qualified purchaser, there are pathways to gain exposure to the alternative asset class. Interval funds, a form of closed-end fund, aggregate the assets of multiple investors while limiting liquidity. This characteristic empowers the fund manager to invest in alternative strategies that require long-term commitments. Interval funds carry various levels of risk, spanning from venture capital to private credit. Because these funds are structured akin to mutual funds, they can be extended to individual investors without imposing the constraints of net worth prerequisites.
Since they are not traded on any exchanges, interval funds demonstrate lower correlation with typical stock and bond investments. This divergence may offer increased diversity and help mitigate volatility within a portfolio. The risk/reward profile also diverges from that of other alternative investments. Interval funds typically offer only periodic liquidity a few times per year and might even limit liquidity availability, restricting it to 5% to 25% of fund assets. Additionally, these funds do not guarantee investors will be able to redeem their shares during a redemption period. The trade-off for this limited liquidity is a slightly lower return compared to other alternative assets, which generally entail several years of illiquidity in exchange for the potential of higher returns.
Although the interval fund itself adheres to regular filings with the U.S. Securities and Exchange Commission, the underlying private equity companies remain unregulated, unlike publicly traded companies. As a result, their financial statements might not undergo auditing. When entrusting funds to a manager, investors may need to rely on a thorough due diligence process to identify an interval fund manager with a proven track record and ample experience.
The heightened accessibility of the alternative investment strategy renders these opportunities worthy of prudent consideration for investors. With 90% of the businesses available for investment being private, small- and medium-sized enterprises, the investor must weigh the chance for diversification, reduced volatility, and the potential for heightened returns against the risk of investing in such assets. Although individual retail investors aren’t required to meet specific qualifications for investing in an interval fund, it’s still advisable for them to work with a financial adviser to determine the appropriateness of such an investment.
If you have questions on whether alternative investments like interval funds are a fit for your overarching financial strategy, the experts at Henssler Financial will be glad to help:
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- Phone: 770-429-9166
Listen to the August 5, 2023 “Henssler Money Talks” episode.