The way we invest is changing. Technology makes investing easy and more accessible than ever. Meanwhile, Millennials and Gen Z are gravitating away from public equity investments.
These changes have led to the rise of alternative assets. People are increasingly looking for new and innovative ways to approach investing. But are alternative assets truly the new frontier of modern investing?
What is an alternative asset?
As the name suggests, alternative assets are an alternative to traditional assets, like stock, bonds and cash. The term usually describes unconventional investments. That can include anything from a Honus Wagner baseball card to bottles of fine wine. However, it can also apply to more familiar investments, like real estate and private mortgages.
Simply put: alternative assets are the things that probably wouldn’t come up when you meet with your financial advisor. They are not easily categorizable, which makes them more difficult to manage. Often, people invest in alternative assets because of a passion for the asset rather than the immediate ROI.
What makes alternative assets an attractive investment?
Investors will go wherever there is money to be made. That includes alternative assets. In addition to higher potential returns, alternative assets have distinct characteristics from traditional assets. Here are a couple of factors to consider when looking at alternative assets:
Portfolio Diversification
You’ve probably heard about not putting all your eggs in one basket. The farmer that came up with that was right. Spreading your eggs, or in this case investments, within and across many asset classes, protects you from any sudden drops or potential risks.
The best alternative asset classes offer a range of risk and performance profiles. That way, you can design that part of your portfolio around your risk tolerance. Alternative assets are also useful because they defy industry trends. They have a relatively low correlation with stocks and bonds. Therefore, if there is a sharp economic downturn, these investments can provide recession resistance.
Case in point: The Dow Jones and S&P 500 fell more than 20% in the first quarter due to the coronavirus recession. Meanwhile, my startup — an online platform for fine wine as an asset class — experienced 1% growth.
ROI
Alternative assets have tantalizingly high return potential. Take the results of the Knight Frank Luxury Index (KFLII), which measures the performance of investment-grade assets ranging from coins to cars. Over the past decade, the top performers were:
- Rare whiskey: 563%
- Coins: 193%
- Cars: 189%
- Art: 148%
- Wine: 127%
- Jewelry: 112%
The keyword here is “investment-grade.” You can’t buy a painting from your local art gallery and expect it to appreciate 148%. It has to have value to collectors around the world.
Don’t know anything about fine art? That’s okay. Alternative asset platforms are solving that problem. For example, a company like Masterworks does the art research for you. When it comes to investing, you can purchase a piece of blue-chip art in their portfolio, including works by Andy Warhol and Mark Rothko, in exchange for a small fee.
Liquidity
Generally speaking, alternative assets are less liquid than traditional ones. While there are some exceptions, like Coinbase, this feature is problematic if you want to sell immediately. For instance, if you own a Honus Wagner card outright, you’ll probably need appraisers, marketers and auctioneers to sell it.
Low liquidity has benefits, though. If there is a financial panic, it is borderline impossible to have a fire sale of alternative assets. That means your investments will retain much of their value, even if the stock market is volatile.
Custody
One of the compelling features of alternative assets is that you can own a piece of history without breaking the bank. For instance, Rally had an IPO for the first The Amazing Spider-Man comic. By paying $22, you can own one share of the book.
This is not the same as buying the comic and taking it home. Rally, like many platforms, maintains custody of the asset. They are responsible for storage, upkeep and insurance to ensure long-term appreciation. In exchange, investors pay a small annual fee. This approach is a significant victory for investors.
Accreditation
Traditionally, private equity investing has been reserved for accredited investors. That means you have 1) a net worth of $1 million (not including the equity in your home) and 2) earned at least $200,000 the last two years. Unsurprisingly, only 3% of Americans meet these criteria.
Alternative assets are breaking down those barriers. Thanks to the JOBS Act, equity crowdfunding is legal. Even though startup investing has opened up a lot in recent years, unlike other alternative asset platforms, you still largely need to be accredited to access a vast majority of deals.
With crypto, wine, sneakers, comic books, watches and art, this is not the case.
Alternative asset opportunities
If you’re ready to invest in alternative assets, there are plenty of options to choose from. Here are a couple of companies to get you started with alternative investments.
Coinbase
A decade ago, Laszlo Hayecz became the first person to conduct a transaction with Bitcoin. He purchased two pizzas from Papa John’s with 10,000 bitcoins. Today, those bitcoins are worth roughly $80 million.
While it’s easy to wish we were delivering pizzas that day, cryptocurrency exchanges were in their infancy in 2010. The niche asset was hard to trust and even harder to obtain. Coinbase came long in 2012 and added credibility to the digital currency. That included adding data protection, insurance and fraud prevention measures.
Today, Coinbase is one of the largest digital currency exchanges in the world. Investors can take advantage of an intuitive interface and high liquidity for a modernized investing experience. If you are unfamiliar with cryptocurrency, there are even guides to buy and learn about cryptocurrency.
StockX
Retro Jordans. Adidas Yeezys. Nike Mag Back to the Future. Sneakerheads can get their hands on these and more thanks to StockX. Before StockX, people had to scour websites to find shoes, and could only hope they weren’t getting ripped off in the process.
StockX aggregated those websites into a single location creating “the world’s first stock market for things.” Its transparent pricing made buying and selling shoes a free market.
More importantly, the company instilled credibility into the platform. Every purchase comes with a 100% authenticity guarantee. While many people use StockX to purchase sneakers, the platform also extends its credence to streetwear, handbags, watches and collectibles.
Vinovest
My startup, Vinovest, provides access to these markets with a platform that connects buyers and sellers in a single location. We also incorporate wine exchanges, private collectors, auction houses and retailers to give investors expansive access to fine wines.
Additionally, we have a novel approach to custody; Vinovest insures, authenticates and stores bottles in state-of-the-art facilities. Investors can buy an index of high risk/high reward wines but also choose low risk/stable wines as well. Clients can sell their wine through our platform and realize the returns, or they can select bottles from their portfolio that we will deliver to their homes.
The future of alternative assets
Experts project the alternative investment industry to reach $14 trillion by 2023. That represents a 59% growth from its current asset valuation.
This rise corresponds with the increasing democratization of investing. Technology has lowered the barriers to entry and made investing more approachable and accessible. People that would never invest are doing so thanks to user-friendly platforms.
The future of alternative assets is bright. While Coinbase and StockX are notable examples, there are plenty of other pioneers in this frontier, including StartEngine, Yieldstreet, Prosper and Fundrise.
The promising trajectory means alternatives are on their way to becoming the new norm.