Cooper Fazzino Private Client Group Christopher Fazzino, CRPC® Associate Financial Professional 1 Financial Plaza Suite 2110 Providence, RI 02903 401-277-0114 [email protected] https://www.oppenheimer.com/cooperfazzinogroup/index.aspx Beyond Traditional Asset Classes: Exploring Alternatives Stocks, bonds, and cash are fundamental strategies, which may include pairs trading, long-short components of an investment portfolio. However, strategies, and use of leverage and derivatives. many other investments can be used to try to spice Participation in hedge funds is typically limited to up returns or reduce overall portfolio risk. So-called "accredited investors," who must meet alternative assets have become popular in recent SEC-mandated high levels of net worth and ongoing years as a way to provide greater diversification. income (individual funds also usually require very What is an alternative asset? high minimum investments). The term "alternative asset" is highly flexible; it can Private equity/venture capital mean almost anything whose investment Like stock shares, private equity and venture capital performance is not correlated with that of stocks and represent an ownership interest in one or more bonds. It may include physical assets, such as companies, but firms that make private equity precious metals, real estate, or commodities. In some investments may or may not be listed or traded on a cases, geographic regions, such as emerging global public market or exchange. Private equity firms often markets, are considered alternative assets. Complex are involved directly with management of the or novel investing methods also qualify. For example, businesses in which they invest. hedge funds use techniques that are off-limits for Funds of hedge funds Private equity often requires a long-term focus. most mutual funds, while private equity investments Investments may take years to produce any If you do not qualify to rely on skill in selecting and managing specific meaningful cash flow (if indeed they ever do); many invest directly in a hedge businesses. Finally, collectibles are included because fund, you may be able to funds have 10-year time horizons and you may not the value of your investment depends on the unique have access to your funds when you want them. Like find a fund that invests in properties of a specific item as well as general multiple hedge funds and hedge funds, private equity also typically requires a requires a lower minimum interest in that type of collectible. large investment and is available only to investors investment, though that Each alternative asset type involves its own unique who meet SEC net worth and income requirements. minimum usually is still risks and may not be suitable for all investors. higher than most Because of the complexities of these various markets, Real estate mutual-fund minimums. By you would do well to seek expert guidance if you want investing in multiple You may make either direct or indirect investments in investing styles, managers, to include alternative assets in a portfolio. buildings — either commercial or residential — and/or and strategies, a fund of Hedge funds land. Direct investment involves the purchase, funds may provide greater improvement, and/or rental of property. Indirect diversification than a single Hedge funds are private investment vehicles that investments are made through an entity that invests hedge fund. Be aware that manage money for institutions and wealthy in property, such as a real estate investment trust a fund of funds may or may individuals. They generally are organized as limited (REIT), which may be either publicly traded or not. not be registered with the partnerships, with the fund managers as general Real estate not only has a relatively low correlation SEC; be sure to check. partners and the investors as limited partners. The with the behavior of the stock market, but also is often Even if it is registered, any SEC protections apply only general partner may receive a percentage of the viewed as a hedge against inflation. However, bear in to the fund of funds, not assets, fees based on performance, or both. mind that physical real estate can be highly illiquid, necessarily to the Hedge funds originally derived their name from their may involve more work on your part to manage, and underlying funds in which it ability to hedge against a market downturn by selling may be subject to weather hazards, rezoning or other invests. Also, you will pay short. Though they may invest in stocks and bonds, factors that can reduce the value of your property. fees charged by both the hedge funds are considered an alternative asset class The value of a traded REIT will depend on fund of funds and each fluctuations in the value of its real estate holdings as underlying fund. because of their unique, proprietary investing June 09, 2021 Page 1 of 2, see disclaimer on final page well as investor sentiment and market volatility. The businesses, futures contracts also are bought and value of a nontraded REIT is directly based on the sold as investments in themselves, and some mutual value of its underlying real estate holdings. All REITs funds and ETFs are based on futures indexes. are subject to the risks associated with the real estate Futures allow an investor to leverage a relatively market in general. Also, some types of REITs are small amount of capital. However, they are highly considered more illiquid than others, which could speculative, and that leverage also magnifies the mean problems if you need to sell quickly. potential for loss in a relatively short period of time. Precious metals Art, antiques, gems, and collectibles Investors have traditionally purchased precious Some investors are drawn to these because they may metals because they believe that gold, silver, and retain value or even appreciate as inflation rises. platinum provide security in times of economic and However, those values can be unpredictable because social upheaval. Gold, for instance, has historically they are affected by supply and demand, economic been seen as an alternative to paper currency and conditions, and the quality of an individual piece or therefore may help hedge against inflation and collection. currency fluctuations. As a result, gold prices often rise when investors are worried that the dollar is Why invest in alternative asset Before investing in a losing value, though prices can fall just as quickly. mutual fund or ETF, classes? including one that There are many ways to invest in precious metals. In Part of sound portfolio management is diversifying invests in any kind of addition to buying bullion or coins, you can invest in alternative asset class, investments so that if one type of investment is futures, shares of mining companies, sector funds, performing poorly, another may be doing well. As carefully consider its and exchange-traded funds (ETFs). investment objectives, previously indicated, returns on some alternative risks, fees, and Natural resources/equipment leasing investments are based on factors unique to a specific expenses, which can be investment. Also, the asset class as a whole may found in the prospectus Direct investments in natural resources, such as behave differently from stocks or bonds. available from the fund. timber, oil, or natural gas, can be done through limited Read it carefully before partnerships that provide income from the resources An alternative asset's lack of correlation with other investing. REITs are also produced. In some cases, such as timber, the types of investments gives it potential to complement sold by prospectus. resource replenishes itself; in other cases, such as oil more traditional asset classes and provide an or natural gas, it may be depleted over time. additional layer of diversification for money that is not Timberland also may be converted for use as a real part of your core portfolio, though diversification estate development. Some limited partnerships pool cannot guarantee a profit or ensure against a loss. your money with that of other investors to invest in Tradeoffs you need to understand equipment leasing businesses, giving you partial ownership of the equipment those businesses lease Alternative assets can be less liquid than stock or out, such as construction equipment. bonds. Depending on the investment, there may be restrictions on when you can sell, and you may or Commodities and financial futures may not be able to find a buyer. Performance, values, Commodities are physical substances that are and risks may be difficult to research and assess fundamental to creating other products and are accurately. Also, you may not be eligible for direct basically indistinguishable from one another. investment in hedge funds or private equity. Examples include oil and natural gas; agricultural The unique properties of alternative asset classes products; livestock such as hogs; and metals such as also mean that they can involve a high degree of risk. copper and zinc. Because some are subject to less regulation than Commodities are typically traded through futures other investments, there may be fewer constraints to contracts, which promise delivery on a certain date at prevent potential manipulation or to limit risk from a specified price. Futures contracts also are available highly concentrated positions in a single investment. for financial instruments, such as a security, a stock Finally, hard assets, such as gold bullion, may involve index, or a currency. Though the futures market was special concerns, such as storage and insurance, created to facilitate trading among companies that while natural resources and commodities can suffer produce, own, or use commodities in their from unusual weather or natural disasters. IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.