Alternative Investments For The Middle-Class Millionaire

Jeff Mount - President of Real Intelligence LLC hosts Chris Carsley - CIO of Kirkland Capital Group.

Chris Carsley of Kirkland Capital joins us to inform our listeners (business owners, corporate executives, and financial advisors) on the significant alternative investment opportunities that are now available to middle-class millionaires. These unique opportunities are no longer reserved for the super-rich but are available to support the essential family office experience, which we promote here at Dynamic Mapping. If you have ever dreamed of investing in commercial real estate, long/short investments, etc., then this informative episode is for you!

“You’re taking a long hold of something extremely risky. There is a high chance of total capital loss, but if you can build a diversified portfolio of these companies, you’re lucky.”

— Chris Carsley

Listen to the Interview

Transcript

Jeff: We made it. We passed the January 17th, the day new year's resolutions die. I'm still focused on financial, wellness, simplifying financial planning, and improving the investor's experience with advisors. Now, if you are an advisor and you are interested in learning a dynamic map method and becoming part of the essential family office experience, please introduce yourself to us in the website.

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Manage all of this and they work together for your benefit to preserve your wealth, to restore your time and to do so with a high degree of privacy and discretion. I am very excited to introduce Chris Carsley. Chrisis with Kirkland capital and he is going to talk to us about alternatives before we get started on, you know, Is your new year's resolution still?

Chris: I actually never make new year's resolutions. There's just too much to do so you just get on it. And I already exercise a lot, so I don't need to add that one to my list.

Jeff: Ah, boy, it's funny. My wife said I'm going to go a dry in January and I S and she says, well, you do it with me.

Chris: Why would you do that?

Jeff: Well, it's funny because eventually, she talked me into it, but I was like, look, it's not my new year's resolution. I'm just helping to support you. Well, around, January six, she says, why aren't you home with a bottle of wine? Let's go. So, it didn't last long in any event. I, I didn't have an interest in, your bio.

You mentioned in the bio that you've done a lot with due diligence. Yup. I was a wholesaler for 25 years. I know what due diligence means. However, my wife would watch whenever I go to a due diligence meeting, she knows the places I was going to now, you and I both know it's always in a base basement room with no windows, but it would seem to be in a lot of exotic places.

So she runs a trunk show business. And she says to me, one year at the beginning, she said, I'm going to have the best year ever. We're gonna do nothing but due diligence meetings, what do you know what due diligence meetings are? She goes, yeah, they're parties. You have reggae music. You're on the beach and I'm like, oh my God.

So w we're here to talk about alternatives. And when you first brought this up with me, I thought it was a great idea, especially given how we are expecting more volatility in the stock market, valuations are high. So there's that. And of course, inflation, and you got potential for rising interest rates.

There's a lot of uncertainty in the traditional stuff, but I think it's important that you define for us exactly what our alternatives.

Chris: Yeah, that's a very good question. A lot of people today are hearing about you should add alternatives to your portfolio. And what does that really mean? And unfortunately, it's easier to explain what they're not than what they are, and I'll try to hit both pretty quick.

What they're not is well, traditional investments are your long stocks, long bonds, ETFs. The things that are actually really, you still command most of the investment dollars out there, but to all the factors of what you just mentioned, all that uncertainty, a lot of people are looking towards alternatives.

And so that could be hedge funds. They come in a variety of different styles of hedge funds. It is not just a simple class to you. Don't mention that in a one-off there's venture there's startups, maybe somebody gets a joins board of an angel group. You are basically involving yourself in an alternative investment, you know, platform.

There's obviously real estate and real estate also has a lot of different ways for you to participate and then going even further. You know, you've got esoteric trades that just, you know, you're lucky to run into them. Maybe not. It's, you know, there's a number of different, true arbitrage trades out there.

And then now of course, we have a whole new platform to, for everyone to consider over the last, you know, four or five years is crypto isn't.

Jeff: Crypto is a very popular topic on here. And we've had some experts come in and talk to us about them. And it's funny, I talked to my business partner about crypto and, and he's a very sharp guy, good investor, good financial planner. And I said, so, Mike, what's your thought? Long-term in this stuff. And he goes, 50 50 could be great. Could be a complete failure. I don't know. What's your thought? Well,

Chris: it's very interesting. This is sort of my comment about crypto. Having been, um, a.com child. I was managing money during the.com. So I had a lot of questions coming my way.

I had to do research on what the internet was. I know that sounds kind of interesting, but back in the day, many people weren't even sure what this was and what's a URL. And what does.com even mean? But it was something where, and I also had people that were leaving their jobs at Microsoft to go off and start a dot com and I'm seeing the same trends and a lot of.

What I think about crypto is it's very, very similar to the.com era. There's a mad rush for land everyone's heading west, got their covered wagons. They're not sure you know where the gold is, but they'll find it. And what I think you're looking at is this truly is a new frontier. It is something that will be viable today that viability maybe not.

I mean, the.com has had a huge washout, but out of the rise of that washout, came a whole new era of what became you can't have. I mean, what business doesn't have a website. Who's not on the internet. And I think that that may be, I'm not sure how long that'll take, but I think crypto could be something like that in the future where, excuse me, a lot of businesses will have some form of, you know, token or currency in relation to their business and participating in some fashion, in a chain in the future for, for whatever their business is service or, you know, tangible.

Jeff: How many times do you remember hearing people in 1999? Say the words valuations no longer matter. It's a new economy.

Chris: Oh, I got, I got, I got one better for you. We'll leave names out of it. Cause it's, these people still all exist. I was sitting in a room full of analysts and investment managers. Their job was to make money and money sort of centered around their entire universe.

And we had a big-name wall street analysts come out and say, it's no longer about making money. It's only about capturing eyeballs. That's what this internet.

Jeff: I don't remember that one.

Chris: And, and, and I remember everyone kind of looked around the table, looked at each other and I leaned to the guy next to me. Did he just tell a bunch of money managers that it's not about making money? Yeah. So,

Jeff: oh man. That's that's good. That's good. All right. So alternatives are lots of different things. I think alternatives, I think of course, David Swenson from the Yale endowment. Uh, and of course, he made it very, very popular in the early two thousand.

Um, exactly. What is it about these things that look attractive when stocks and bonds don't look as good? I know we talked about correlation. Please explain to us exactly what this means.

Chris: Well, yeah, let's, I mean, the simple, a definition of correlation, the relationship or connection between two or more data sets or in our case, we'll be talking about assets or investments, you know, in statistics, they call it inter you know, interdependence between, you know, whatever numbers you're looking at, but really it's overtime.

How one asset moves in relation. To another asset or assets within a portfolio. So when I think about correlation, you already have an existing portfolio, you own a number of different things, and you're looking to add something new to your portfolio. One of the things that you should consider is. How has that portfolio going to affect or that new asset going to affect your portfolio when you add it.

And one of the things that you need to consider is that correlation is it like other things you already own. So you're just taking the same kind of risks to earn return, or are you taking a different kind of risk? And some people call these factors, risk factors and earning a, a return. Different source of risk than what you're already exposed to.

And so that's, that's really why correlation is really so important when you're really stopping to think about not one-off investing of, oh, I think this is cool. Oh, I think this is cool. And you get this hodgepodge mix of things and maybe it works out, maybe it doesn't, but you really stop and think about what am I building as a portfolio and what we generally see in alternative.

They have lower correlation to traditional assets. So instead of going out and saying, I'm going to buy, I own apple, but then I'm going to go buy an S and P 500 index. Well, they're pretty highly correlated. You didn't really do much there. So maybe adding something that, you know, maybe it's a private debt, maybe it's venture, you're looking at something that might be totally uncorrelated, but still have the ability to put up a decent return.

Jeff: Okay, so I've you and I both know when someone steps sticks their toe into the water of alternatives, managing expectations is incredibly important. Please explain the difference with an example of non-correlation versus negative correlation.

Chris: Let's back up to our definitions again. Correlations run from. Negative one to one, one, meaning it's a hundred percent correlated. So if my asset goes up, one point, the new asset is going to go up. One point negative correlation is the exact opposite. It means, well, in general, over time, they will move in opposite directions or have no inner dependence of movement. So, and there's lots of different scales.

I know that's a, it's, it's a tough definition to get your head around. Very rarely will you have something that's just in today's global world of where all information is flowing together. Do you have something that's, you know, 100% negatively correlated most portfolios and most assets that you'll look for?

You'll find it's zero correlated or it's a low correlation, you know, 0.1 or 0.2. So there's. Interdependence and movement, but not, you know, I'm, I'm not going to, I mean, there are assets out there that are negatively correlated and there's some argument around, well, alternatives can pose negative correlation.

Because of their illiquidity and the amount of times it's valued. And so

Jeff: I thought about that piece. Yeah. That makes sense.

Chris: There's, there's, there's, there's a lot of math and, and there's some white papers out there that do discuss well, if you don't have an asset that gets priced very often, it doesn't have a lot of movement.

So it appears to be low or sometimes even negatively correlated to, you know, maybe traditional stocks and bonds. And so, you know, Be wary of that. And the other one, even in my own fund, you know, our fund does have negative correlation to a lot of different things. And I always, I always tell people, I go, I just want to be totally clear.

We're only dealing with like 18 data points cause I'm using monthly data. So I'll show you correlations and things will grow, but you don't take it with a grain of salt. You know, it's not correlated to what you own, if these are the assets you own, but I'm dealing with, you know, limited data points too.

So, I mean, there's.

Jeff: I would imagine as a portfolio manager, negative correlation, which I know is more rare would actually offer more certainty in terms of managing.

Chris: Yeah. It's kind of that holy grail. You're looking for. If you can find things that are negatively correlated to what you own and still offer a relatively high return.

It's something you should probably stop. Think about, educate yourself and see if that's something you want to exposure to. And like I said, they do exist out there. It's just, it's one of those things. Is it with a manager you want to work with? Is it something that you want to own, do you feel comfortable with, and can you understand it and properly educate yourself?

Because I always believe in don't buy things. Blindly do.

Jeff: So I I'm aware, of course, when we talk about the essential family office experience for middle-class millionaires, and of course in the traditional family office experience, which of course is families with 50 million or more in investible assets alternatives make up a pretty good part of their portfolio.

How do they use this? Is it really to enhance returns? Is it to manage risk in? Can you give us some examples of how your,

Chris: when you are looking at adding an alternative to your portfolio, there's two things you're really hunting for it. You're looking for an alternative investment that is there to enhance returns.

So you might be looking at, Hey, this does have the volatility to it. It does move around a lot, but. The expected return is relatively, you know, higher than other assets that I might own. So that's one aspect. And that could be as an example, excuse me, that could be venture capital. That could be, you know, the expected return on venture.

You're you're taking a, a long hold into something that is extremely risky. There is a high chance of, you know, total loss of capital. If you can build a diversified portfolio of these companies, or you're lucky. I know some people who've, you know, you know, batting like, you know, five out of 10, which is an amazing ratio.

That's super high, but I do know some people who've done that. Then what you've done is you've added an instrument . That can be extremely volatile. It can go to zero, which is about the worst thing you can have. And you can also have very large return. So that was really a return enhancer. And some people like to think venture is a diversifier of risk.

And I said, well, And there's some math and some things they would come out of MIT and some other white papers that people assess and say, well, wait, there's another way to mathematically solve the inherent volatility of venture, because this is one of those asset classes that can be a little tricky.

They don't really price things very often. And they often leave things at cost or. You know, there's no real rules and a lot of ways of, you know, how your value and your venture portfolio over time until there's an actual exit or, oh, that company went to zero and so it can appear to be less volatile, but you need to deal with the inherent volatility of the portfolio, recognizing that there's a large prop, a probability of a large portion of the portfolio going to zero.

Well, that is inherently volatility. You just need to assess and forecast what that might be and apply it to your portfolio. There again, I understand that's getting kind of complicated, but that's how a lot of people are now looking at venture and saying, wait, this is not really diversifying risk per se, from a volatility or exposure to loss it, but it is a, an amazing return enhancer.

Now the other side of the coin is I'm adding alternatives to diversify risk. And so inter the classic, you know, managed futures or a true hedge fund. And I know let's, let's back up and, you know, hedge funds come in lots. Flavors and colors, but the keyword hedge, you are offsetting a series of risks. One of the classic and probably most common is your long short equity.

They are purposely taking short positions, inequities to lower volatility, but holding. And, you know, the better long short managers are actually that short book is also there to generate excess returns on a relative basis. So one of the ways we used to look at hedge funds is break apart. Their long book and their short book.

Are they making money on both sides? Whereas the short book, really just a dampener to risk, but that's, that's a, that's a trick you can look at, but so you're either enhancing. Or you're diversifying risk and there's lots of alternatives that can do both. So be sure to identify what you're trying to do and what that alternative investment can, you know can bring to you.

Jeff: So you just mentioned something that of course hedge funds are famous for going short.

We know that quite well. And you said that a few minutes ago, one of the worst things that could happen is you could go to zero. I think it's important to point out to investors that shorting could actually go into zero. Might not be the worst possible thing that could go. You can lose more than 100% of your investments that way.

Chris: Yeah. Yeah, no, I mean, shorting is not many people are very good at it and mean it takes a very special person to think about the word. Upside down. Yeah. Of like I'm no longer looking for winners. People are born and raised gravitating themselves and looking for the identifying factors of a winner. Now turn your brain completely upside down.

And your entire life is now looking for all the factors that are two losers. And it can get pretty tricky to talk about all these people that are short and Tesla. That's a, that's been a tough trade for them, even though you have a lot of factors that don't make any sense. That stock is squeezed. A lot of people out it's been an ugly trade for a lot of people.

Jeff: Yup. Yup. You also mentioned earlier the liquid and illiquid alts. Let's talk a little about that. I know having been a wholesaler for 25 years, and of course I worked with a number of the liquid alt firms. Who's struggled with performance since day one. Tell us the difference. What does that liquidity window feel like?

And how much of a difference does?

Chris: Well, there's been a lot of studies I have to admit. I I'm kind of dated. I think the last study I read was, you know, early 20, 20, so not too old. I know that liquid ALS there again, let's back up and talk about the definition. A liquid alt is the utilization of usually a derivative.

Uh, structure options, futures, SWAT, something that is creating a payout profile and, or a risk profile that's mimicking and illiquid alternative strategy. So that's what a liquid alt is. Now, when you inherently do that and you're using instruments, that aren't exactly what let's say. Let's just use a simple example.

I'm going to create a liquid, all that's going to mimic a series of hedge fund strategies or a basket of hedge fund strategies in long short. Well, I'm not actually doing what the hedge is doing. So I'm using instruments that aren't exactly like that they're not going to react the same way in the market all the time.

And so what you generally have seen is that hedge fund that illiquid alternative outperformed due to the superior management, active management skills of the manager to where the liquid. You know, had what they call a basis risk or a spread because it's not using the same instruments. So what you've seen as a, as a, as an underperformance, even though the liquid alt may be cheaper and, you know, and obviously by its name, it has liquidity, you know, you can get in and out of it quite easily.

It, it, that, that difference in the one reason, I, I've never done a lot of liquid, all the investing, but the similarity that I've had was I used to do, uh, lots of hedging. And when I'm trying to hedge. And it's an exposure or risk in an illiquid portfolio. So now I'm trying to do the same thing, but remove risk from say a hedge fund that I'm invested in.

You're there again, using an instrument, like say a Russell, 2000 index or something like that. And I'm basically going short that index to offset a risk. It's not the exact instrument. It's not exactly what they're doing. So in a gap movement, or when you see something in the market that moves quickly.

That's where you start to see that the liquid alt is not exactly the illiquid. It moves in a totally different fashion and it, at least historically it has underperformed. Now with that said, you know, take, take that with a grain of salt. I mean, when you're going into a liquid, alt your actually, well, your liquid, eh, so you're getting that advantage.

You're under greater regulation. So that's, that's, that's a good thing. And you'll have full transplant. Okay. Well, one of the key things is you're paid a return for certain levels of risks that you take. And one of them is illiquidity. And so in my mind, it's always been, you can't expect a liquid alt to outperform it's illiquid cousin, because you're not, you shouldn't be rewarded, uh, with a higher return.

For getting something that's liquid. I mean, that's just how the market works overtime. And so just think about why I'm looking at liquid all. Why am I adding it and where I'm going with this is even though they haven't performed, outperformed their illiquid cousins, they have actually been useful for certain portfolios as a risk offset because, you know, if you went into the right liquid alt and I was just long, the S and P 500 index.

That has actually been a positive ad from a risk of diversifying. So, you know, the last paper I read did state that you got gotta, what are you trying to get out of it?

Jeff: So, I guess my experience with liquid alts was, uh, a couple of firms. Actually, it wasn't just one. It was several firms where they tried to package one product with whole bunch of liquid alts together.

And of course, what ends up happening is expenses are off the charts high and you end up effectively getting a zero return on.

Chris: If I, if I can effectively buy, if I'm invested in something and I can effectively analyze all the risks in that investment and I hedge it perfectly. That's what you did get, I just created a zero-turn from that's.

Right? A lot of these guys did a great job,

but if you put enough together and it all offsets everything, oh, you end up was zero.

Jeff: But my favorite was one. One of them did that very successfully, zero return all the time. And they charged three and a half percent a year for it. I'm like, oh wow, this is not working. It is unfortunate. So. All right. So you've mentioned liquidity window. Explain what that looks and feels like.

Chris: Uh, liquidity window.

I just want to make sure with regards to an illiquid

Jeff: illiquid investment, when can I get my money? Gotcha.

Chris: Okay. Yes. The liquidity window is different across a lot of different alternative platforms to say something in managed futures, you might have a very short window where you can get out there pretty easily.

If you're in something that is longer term like venture capital private equity, that could be very long because the liquidity is based on. The nature of the inherent assets that are held by the fund. And some of those could be two years, five years, seven years, 12 years. And so if you've got a smart manager, they are putting together their documents to make sure that the liquidity that they can offer you is matched pretty well with the assets that they're going to hold and why this is important for you to understand as an investor.

Is the number one thing I've seen, that's just blown people up again and again and again, over the last 26 years is an asset liability mismatch. You need to really make sure that the manager understands, Hey, I'm invested in things that are going to take me three years to get out. And if he's offering you monthly liquid, That's a problem.

And these, you start wondering how he's going to facilitate that. And what's the cost to the performance of the, of the fund, if he's doing that, because one of the easy answers that some people have done is, oh, well, I go, I barbell it. I hold a bunch of cash and then I go make investments. So that allows me to meet a certain level of liquidity that.

That's not what you're hiring someone to do. You're hiring for someone to deploy your money, not to cash, but to deploy your money, to whatever they specialize in to give you the return or the exposure for your portfolio that you desire. So, yeah, it's a very important, it's a good question about you, you know, understand the liquidity and make sure that the fund is really matched.

Yes, it is going to hold. So

Jeff: the, the, I think the importance of this conversation coming back to the beginning of this, this podcast is the fact that having a lowly correlated asset class and a manager who can handle lots of different strategies, whether it is long, short venture capital, real estate, whatever the case may be.

It's going to make your returns more predictable because the reduced volatility over time, which comes back to of course, the dynamic mapping method, which talks about your assumed rate of return and how, how important insignificant is your assumption. So if you aren't currently using alternatives, I strongly urge you to start looking at this.

Chris Kirkland capital has a minimum of what and how do they reach you if they're interested in investing with you?

Chris: Oh, yeah. Our fund, the minimum is 50,000 due to our regulatory exemptions. We do only take accredited investors and really the easiest way to reach us is you can obviously reach me at my email, which is chriscarsley@kirklandcapitalgroup.com.

Or you can go to our website, you know, Kirkland capital group, you know, dot com and there's access to any of us. So my partners, so various team members, and you can get information about the fund and. Set up a meeting with us, whatever you need to do. Or if you have questions about alternatives, I do a lot of discussions around due diligence and alternatives.

If you want to talk further about that, I'd love to have the conversation. Is there.

Jeff: Yeah, I really appreciate you being here. I'm excited next week. We're going to have you guys back to talk a little bit more about the real estate management of your portfolio, but I appreciate the high-level look at alternatives today.

And Chris we'll look forward to seeing you again soon.

Chris: All right. I appreciate it. Thanks for the time.