According to a report published by the Money Management Institute estimating the increase recorded in 2014 at 19%, the popularity of alternative investments is growing rapidly among minority investors, indicating a paradigm shift not seen since the advent of exchange-traded funds in 1993.
Institutional investors have, for a long time, used alternative strategies, a broad category which includes everything from real estate and private equity to hedge funds and private-placement debt, as a vital tool to cover the risk of more traditional long-term strategies, which make up most of their equity portfolios.
But now it’s not just them, but individual investors are also positioning themselves in line with the investment options, especially following the global downturn in the financial markets in 2008. Since then, their focus has expanded beyond shares and bonds, to a world of assets which provide a high level of diversification non-correlated with the average ‘Main Street’ portfolio.
Historically, access to these alternative investments was limited to qualified investors, but that barrier is fading, largely because the financial services industry has created vehicles that provide access to alternatives. Thus, mutual funds, with ETFs following closely behind, are currently the most popular vehicles for minority investors.
With a retail market of $ 11.6 trillion in mutual funds, it is not surprising that the financial industry is wildly running to accommodate the growing demand for alternative investment vehicles. Although the amount of $ 139 billion currently included in alternative investment funds is relatively small, that figure has grown steadily over the past five years. Although hedge funds experienced an outflow amounting to $ 6.9 billion in 2013, liquid alternative investment funds gained a further 40 billion during the same period.
Private investors may also gain access to alternative strategies through a network of investment advisors. A large number of private investors already have their own registered investment adviser (RIA) to enter the world of real estate, private placement debt, and direct investments, as well as other alternative strategies. Meanwhile, over 81% of investment advisors are already working with alternative investments for their clients, compared with 74% last year, according to an industry survey.
Prodigy Network, one of the world’s largest Crowd-investing platforms, which invests in Manhattan real estate, is an example of a successful and innovative prospect. The company has successfully raised more than $ 850 million, 30% of which comes from more than 6,200 investors who make up their “crowd”. Together with FlexFunds, an ETPs issuer (Exchange Traded Products), it created a solution that would provide a management and distribution system which would allow investors to participate directly through its investment account.
Another company which fits entirely into the alternative investment category is NXTP Labs, a private investment fund with an accelerated program focused on growing new technology companies with global or regional business in Latin America, which has a strong track record in supporting, accelerating, and selling companies. In its case, it created an ETP, also through FlexFunds, which provides investment advisors with a vehicle, which allows its clients to participate in the direct investment segment of alternative investments.
It seems that, as the alternative investment sector grows, the most innovative platforms, associations, and efficient services, will evolve with them.